Rent-to-Own: The Costly Allure of Low Weekly Payments

Digital Vision/Thinkstock (r)

Initially, the offer in the rent-to-own ad sounds like a deal. You take home a 55-inch LED high-definition television set for a low weekly payment of $40.

What’s the catch? After 128 weeks, interest charges alone total twice the purchase price at a reputable retail store. Bottom line: That $1,800 TV set just cost you $5,120. Now it doesn’t seem like such a deal after all.

Who’s targeted and at what cost?

The allure of low weekly payments is enticing if you don’t have the cash to pay full purchase price, don’t think you have financing options, and you want immediate use of the product. Frequent targets of this high-priced financing include low-income consumers, college students, and military families.

The benefits of rent-to-own financing rarely outweigh the costs. Often, the total cost to rent an item may be two to four times the cash price or even what you would have paid on conventional credit. In testimony before the House Committee on Financial Services, an attorney for the National Consumer Law Center explained that some rent-to-own APRs (annual percentage rates) could be 400% or more.

The rent-to-own trade association boasts that it’s a $5 billion a year industry serving more than three million customers a year. However, a Federal Trade Commission survey found that 19% of rent-to-own customers were dissatisfied with their experience, and most cited high price as the reason. Consumer advocates cite several additional problems, including misleading information from salespeople, penalties for returning items and for stopping payments, additional fees hidden in small print in the contract, and finding out that an item is used.

What questions should you ask?

Before signing on the dotted line of a rent-to-own agreement, ask several questions:

· Does the contract jibe with what the salesperson said? Do the math. Multiply the weekly (or monthly) cost by the number of payments.

· How does the cost of rent-to-own compare with the cost of purchasing the item at a reputable retail store?

· Is there a penalty or late fee for missing a payment? Will the rent-to-own store take away the item?

· Has the item been rented by anyone else?

· Are there charges for delivery, returning merchandise, or repairs? Who is responsible for making repairs?

What are alternatives to rent-to-own?

Saving for the purchase is one option. For example, if you deposited $150 a month for 12 months into a savings vehicle at your credit union, you could pay cash.

A credit card is another option. Let’s return to the example of the 55-inch LED high-definition television. If you financed the TV on your credit union credit card with an interest rate of 14% and make the minimum payments for seven years and eight months, you’d pay about $840 in interest. (And remember, if you make other charges on the card, you extend payment and interest cost even more.) That $1,800 TV now costs $3,190. If you decide to purchase the item with a credit card, make sure it’s a low-rate card and you pay more than the minimum payment monthly.

If you can’t save up to pay the cash price, the least expensive alternative may be to finance the item with a personal loan from Hopewell Federal Credit Union. Our affordable rates are easy on the wallet, and they far outweigh the costly allure of rent-to-own.

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