Recently there have been a lot commercials on television by rent to own stores, including one that especially grates on our nerves with the head honcho of the rent-to-own company giving a moving speech about how supportive they are and how great it is to rent-to-own consumer goods (furniture, appliances, televisions, electronics). Well, after viewing that about a hundred times we decided we had to wipe the tears from our eyes and give a bit of personal finance advice to our readers about rent to own stores.
To put it bluntly: for most folks, renting to own is about the worst way possible to buy consumer goods. Thankfully, it seems most Americans understand this, as past studies have shown that only about 5% of Americans actually use rent-to-own stores to buy consumer goods. Renting to own is such a bad idea that those credit methods usually frowned upon every personal finance blog (credit cards, even dreaded store-issued charge cards) are much preferred to renting to own.
So, you may ask why is renting to own such a bad way to purchase consumer goods? It all basically comes down to the two main considerations: (1) Price; and (2) Cost of Money.
You only need to do a little bit of comparison shopping to understand how high the purchase prices are at rent to own stores versus “normal” stores. Of course, rent to own stores try not to make this too convenient — web sites for rent to own stores usually don’t list their prices. However, you could do a little bit of comparison shopping before going to a rent to own store to understand the premiums they charge. Also, in just a quick search of the Internet you can find plenty of comments about prices being twice (or more) the normal price.
But price is only half of the story, the other half is cost of money. Our cost of money with loans or credit cards is the interest that we pay. Most states have usury laws setting a maximum amount for the interest rates that lenders can charge — they may be high limits (say around 30%), but there are limits. However, because renting to own is usually not viewed as “lending”, the cost you pay for the transaction is not limited by usury laws. The result: you might end up paying 50% or more per year for the trasaction — it’s not technically interest, but it is your cost for not having the money to pay up front. Again, a quick search of the internet will turn up comments by people who end up paying four times or more the purchase price of the goods.
We realize that sometimes emergencies may happen where things break, and people with really low credit stores may feel compelled to resort to renting-to-own a refrigerator. However, we recommend that renting to own should only be an absolute last resort for an essential item — please don’t buy a game system, a big flat screen TV or other non-essential items this way, as you will really be paying entirely too much!