For many consumers with poor or nonexistent credit histories, owning big ticket items such as furniture, electronics or cars can seem like a pipe dream. Qualified buyers can often get low-interest loans from banks to finance these purchases, but others can only qualify to pay high-interest rental prices every month. There is no sense of ownership under traditional rental agreements. If the renter cannot make the rental payment, the item is repossessed by the owner.
This seeming inequality between renters and buyers led to the development of the rent to own business model. This arrangement starts off as a traditional rental agreement, but the two parties agree to transfer ownership at the end of a specified period of time. The seller benefits from the higher monthly interest rates paid for the item, while the buyer benefits from the less restrictive credit qualifications. A consumer with a poor credit history can usually enter into such an agreement with only a few references and proof of steady employment.
Critics of the rent to own system point out that the buyer is often forced to pay an interest rate bordering on illegal usury. A $500 US dollar (USD) television set, for example, might end up costing the buyer nearly $1,200 USD in total payments. Since these monthly payments are usually smaller than equivalent bank loans, the buyer doesn't always feel the pinch. The seller can afford to take an occasional loss as long as those who remain in the program continue until the end. Repossessed items can always be sold again.
Not all rental companies offer rent to own plans. Many of their customers are satisfied with paying monthly rental fees instead of worrying about making payments on bank loans. Rent to own arrangements tend to appeal to those customers who would have great difficulty obtaining household loans from a bank, but don't want to keep paying for property they will never own. Despite the higher interest rates and unfavorable conditions, these customers will eventually assume ownership rights to their purchases. The alternative might be to buy inferior or used goods with available cash, or enter into other high interest loans with lending institutions.
Some products, such as furniture and electronics, lend themselves well to rent to own arrangements. The quality is usually high and the total number of payments required for ownership is low. The danger comes with very expensive items such as plasma televisions, jewelry or cars. The number of payments required for ownership may be excessive, and repossession may prove especially costly. Rent to own arrangements are not illegal, but consumers should be aware of all the hidden costs and conditions before signing on the dotted line.
