As the name would suggest, rent-to-own is a way to obtain goods (electronics, furniture, appliances, etc.) through a legal contract agreement that requires the buyer to make a monthly (or weekly) payment, without exception, for the duration of the contract. Assuming the buyer makes all required payments, when the contract ends, the product is theirs to keep.
What drives this $7.9-billion industry? Consumers consider rent-to-own options for a variety of reasons, but many turn to this method of purchase simply because it provides immediate access to the brand-name products they need without the need for significant pre-purchase savings, credit checks, down payments, or long-term commitments—renters can return the product when they’re done with it or no longer can/want to make the payments.
From a high level, rent-to-own agreements may seem like a safe bet when compared to other purchasing options, but in many cases, that’s far from the case. Rent-to-own options, which typically are advertised with affordable monthly payments, come with significant interest rates. This is particularly true for longer contracts (24 months), which can easily cost consumers double or triple the original price of the product.
For some, renting to own may be the only option, or even the best option. Consider a television purchase made just in time for the “big game.” A 70-inch smart TV may be perfect for your Super Bowl party, but it might not be practical (or affordable) at the present time or for the long haul. Renting the TV and then returning it within the week can be a wiser idea than putting yourself on the hook for a thousand-dollar television. But for those who plan to keep the product, a rent-to-own agreement may prove to be tough on the wallet.
Before you jump into a rent-to-own agreement (or any financial agreement, for that matter), there is one thing you should always do—shop around and consider all your options. There are a variety of rent-to-own alternatives you can use to make big purchases. Some, like saving up for the purchase over time or placing the item on layaway, might not be the quickest routes, but they can have a less detrimental impact on your finances. However, if time is of the essence, a credit card or personal loan may be a reasonable solution.
Credit Cards as an Alternative
Credit cards, like rent-to-own, allow buyers to obtain a product immediately and pay for it over time. However, under the right circumstances, a credit card can save you hundreds of dollars when compared to some rent-to-own arrangements.
Many big box stores and credit card companies offer 0% financing promotions when you make a purchase with the card during a designated time frame or within a certain price threshold. In this case, you may find that you can purchase the item up front and make reasonable payments to pay off the debt within the promotional period.
Additionally, credit cards enable you to shop around for the best price, as opposed to accepting the rental center’s pricing, which means you can snag an even better deal without racking up unnecessary interest.
Even if you are responsible for paying interest, if you have reasonable credit, you may find the interest rate still beats that of the rent-to-own company.
Take, for example, a refrigerator that costs $1,439 at a popular home improvement store. That same refrigerator, if purchased from a popular rent-to-own store at $99.99 a month for a 24-month term, will end up costing $2,399.76. That’s an interest rate of over 57%, and over 30 points higher than the average “bad credit” credit card rate (23.7%).
Personal Loans as an Alternative
In many ways, personal loans offer the same benefits as credit cards when it comes to making big purchases. You can shop around and find the best deal, and you can potentially pay a lot less in the long run.
Personal loan rates vary based on credit, loan amount, and even lender, but generally speaking, the average personal loan rate typically falls somewhere between 10% and 28%. Even if you were approved for a rate of 28%, using the same example above, the refrigerator that cost $1,439 outright and $2,399.76 through the rent-to-own program would cost $1,848. That’s $500 less than the rent-to-own agreement.
Of course, it’s worth noting that personal loans might not always be an option. Of course, credit scores and your credit history will come into play, but many lenders also have minimum loan amount requirements, making it difficult to finance smaller items (laptops, some TVs, basic washing machines, etc.) via a personal loan.
Additionally, many personal loan lenders require borrowers to pay an origination fee (percentage of the total loan amount) in addition to the interest rate, which may negate any potential savings, so be sure to read the fine print and identify any fees you’ll be responsible for.
Rent-to-Own Alternatives Roundup
Each product is different, and your rates, terms, and fees will ultimately determine which payment method is best (or worst). However, here’s a quick breakdown of the potential difference between these three purchasing methods.
The product, a $549 laptop, is available at a rent-to-own center for $64.99 for 12 months. The example below assumes that the buyer has average credit and will pay off the loan or credit card in 12 months.
|Rent to Own||Credit Card||Personal Loan|
Credit cards and personal loans can represent a better option when compared with some rent-to-own agreements, but if you’re unable to secure a credit card or personal loan, or if you only qualify for high interest rates and/or need to pay an origination fee, a rent-to-own agreement can be a viable option. However, if you do get an item through the rent-to-own process, you can save the most money by choosing the shortest terms and paying it off as quickly as possible.
Before you dive in, make sure you run some numbers and ensure that renting to own is the best option if it’s not your only option.