Buying products that you need can be expensive, which is why many may choose to rent them. One method that continues to thrive is the rent-to-own model.
But is rent-to-own worth it? More importantly, is rent-to-own a scam?
Considering Rent-To-Own? Read This
In this article, we’ll cover whether rent-to-own is worth it for you, including some alternatives that could save you money. We’ll also get some sage advice on the subject from money expert Clark Howard.
First of all, let’s answer the big question:
Is Rent-To-Own a Scam?
Rent-to-own is not a scam from a legal standpoint, but it never works in favor of your wallet, despite how attractive it sounds upfront. Rent-to-own plans entice people with what looks like super-affordable weekly or monthly payments, but the downsides are many, according to Clark.
“The promises made by rent-to-own stores sound alluring. They’ll say you can have this new TV, computer, washer, dryer, even furniture for only $9.99 or whatever it is per week,” Clark says. “But rent-to-own is a way to get yourself into so much more financial trouble than you’re already in.”
And while there are such things as rent-to-own scams across several markets, including real estate, timeshare communities, appliances and more, the payment method in itself is not a scam. But you still need to be careful with it!
One of the major issues with rent-to-own companies is that many of them can be less than forthcoming about interest rate disclosures and even what your final bill will be.
The truth is that rent-to-own companies are under no legal obligation to be clear about the interest rates you pay. Here’s an excerpt from the New Hampshire Department of Justice website:
“Because a rent-to-own contract is NOT a credit agreement but a rental contract, it does not come under the federal Truth-in-Lending Act’s interest rates and finance charge disclosure requirements.”
How Does Rent-To-Own Work?
Rent-to-own is a purchase model that allows the customer to receive the product they want by agreeing to make monthly payments on it until its cost is paid in full.
The concept sounds simple enough, but it’s the small print that eventually burns the consumer.
Some things that consumers never ask — or bother to read in their contracts — are the loan terms and what happens when a payment to the rent-to-own company is late or missed.
“Those places are poison to your pocketbook,” Clark says. “You pay what seems like such a small amount per week. But if you miss a single payment — and I’m talking after you’ve been paying on time for months and months — they come and take away whatever it was they gave you.”
So here’s what you need to know about most rent-to-own plans.
You End Up Paying More
Typical rent-to-own plans will end up costing you more money than buying the product straight out.
According to the Federal Trade Commission (FTC), no matter how the terms are presented, you have two choices:
- “A longer contract term means you’ll pay less each month, but in the end you’ll pay more in total through price markups and fees,” the FTC says.
- “A shorter contract term means you’ll pay more each month, but in the end you’ll pay less in total than with a longer contract,” the agency says.
It’s easy to assume that your entire payment is going toward the purchase of an item, but that’s not how it usually works. Only a portion of what you pay each month will go toward the bottom line of the item. That portion may increase or decrease over the terms of the loans depending on the agreement.
Many people ensnared in rent-to-own agreements end up paying hundreds or thousands of dollars more for a product than it costs at retail. Google has a word for this. It’s called a ripoff.
The Goods Are Overpriced
Another downside with rent-to-own is that the item or product you want is typically overpriced, which is what necessitates the rent-to-own model in the first place.
For example, rent-to-own stores typically offer several selling points to get you to buy:
- No credit check
- No money down
- Free delivery
What they don’t offer are cheap products. For example, I recently saw a 512GB HP Victus Gaming Desktop Bundle at a rent-to-own place with terms of $38 a week for 78 weeks or $165 a month for 18 months. Doing the math, that comes out to $2,970.
Screenshot via aarons.com
I saw a very similar HP computer on the manufacturer’s website for about $830.
As you can see from that example, what you’re trying to buy will cost you more money down the line than a similar product in a traditional store.
Predatory Interest Rates
Another reason why you’ll pay more with rent-to-own is that you’ll likely be charged astronomical interest rates.
While it’s true that big bank cards or retail store cards — neither of which Clark is a fan of — may have high rates as well, they often offer introductory rates that may be favorable for you. Not so with rent-to-own stores, which look to lock you into high rates from the start.
A Better Way: Rent-To-Own Alternatives
Here are some alternatives to going the rent-to-own route for purchasing the things you need and want:
Save Up the Money
Clark is a big proponent of saving by creating a fund, typically a separate bank account, for items you want to purchase.
Just in case the unexpected happens, you should have an emergency fund or “Oops” fund. How much you put into it depends on your circumstances.
“If you don’t have savings, then you’re not prepared for the ‘oops’ in life,” Clark says. “Because ‘oops’ happen — all different types and sizes — and a lot of times we’re not in a position to deal with them.”
Our in-depth guide on how to create an emergency fund will show you how to prepare for the unexpected.
Clark also has utilized what he calls a “Countdown Fund.”
“The Countdown Fund is simple to use: Just take the amount of money you need to save, divide by the number of months until you want or need the new item, and put that much money into a savings account each month. For instance, if you wanted that new 50-inch Samsung Hi-Def TV (which costs roughly $600 at a traditional store), and you wanted to be able to buy it within six months, you’d save $100 a month.”
Read up on our comprehensive guide to saving money.
Buy Used Or Refurbished Items
Another way to save on the items you buy is to look at used or refurbished items.
You may be able to save significantly with items on eBay or Craigslist, but my favorite place to buy refurbished stuff is on Amazon Renewed.
It’s a program that the world’s largest online retailer uses to sell its certified refurbished devices in like-new condition.
I’ve purchased a MacBook Pro and two iPhones under the program, which comes with a warranty and product guarantee.
Read my in-depth review of Amazon Renewed.
Boost Your Credit Score
It’s proven that consumers with higher credit scores pay lower interest rates. That means if you have to finance an item, you’ll end up paying less in interest for it.
With a lower interest rate, your monthly payments on the money you borrowed will be smaller. Over the course of the loan, you could save hundreds if not thousands of dollars.
This scenario can only happen if you take the steps to boost your credit score. Our guide teaches you how to raise your credit score in sneaky ways.
Final Thoughts
The rent-to-own model is not a scam, but it’s not worth it either.
If you choose to sign a rent-to-own contract, you may have low payments for the life of the loan, but that new furniture set, flat-screen TV, computer or appliance will cost you more over the long run.
