Why Rent-to-Own Is a Bad Idea


Rent-to-own plans may seem like a good idea at first. But once you look into the total cost, it is apparent that these plans are just too good to be true. In fact, according to Dave Ramsey, it is "one of the worst moves you can make with your money."

How the Plan Works

With a rent-to-own plan, you can enjoy the freedom of making a large purchase with smaller weekly or monthly payments, over a prolonged period of time. The payments include the interest charged and a portion of the principal. Repaying this obligation is similar to repaying a credit card obligation.

It'll Cost You in the End

The problem with these programs is the finance charge. Even using a credit card with a 20% APR would save you money compared to a rent-to-own program, which you will need to pay off over a significant amount of time (on a weekly, semimonthly, or monthly basis). The longer your contract is, the more you will pay in finance charges.

Rent-to-own plans are significantly more expensive than outright purchases. By paying the purchase cost and effective interest rate over time, you can expect to spend significantly more than the retail price. In fact, according to Consumer Affairs, "Even in the best-case scenario, you'll pay at least twice the standard retail price." (See also: This Is How Much a "Rent-to-Own" TV Really Costs)

Rent-to-Own Programs Are Unregulated

Rent-to-own programs do not require credit and are not a form of credit, so they are excluded from regulation by federal law. While some states do effectively regulate the purchase agreements, there are other states that have no regulations at all, which means that the buyer is taking on all the risk.

What About Missed Payments?

Some rental centers are lenient about missed payments and might just charge a late payment fee, but will allow you to keep the item. However, there are some rental centers that will repossess the item should you miss a payment. In this case, you will experience the worst of both worlds. You will lose the money that you invested toward the purchase of the item, and the item will be repossessed.

Unexpected Additional Fees

If you will only be using the item for a short amount of time, such as for a prolonged business trip, make sure the rental center you choose offers free repairs, delivery, pick up, and set up. This should be standard because the last thing you want is to be paying additional fees on top of the already exorbitant prices. These unexpected additional fees can really add up, so make sure to inquire about them before signing any agreements.

Is It Ever a Good Idea?

The only time rent-to-own may be a good idea (for the short-term) is in the following situations:

  • You are traveling for business and need furniture and appliances for a short period of time. The benefit of rent-to-own programs is you only pay for the item as long as you need it, and you can stop making payments once you are ready to return the item.
  • You need appliances or furniture right away and you can't wait until you have the money to purchase them.
  • You frequently get bored with your appliances and like to upgrade often. Some rental centers will allow you to upgrade to newer products and technologies at no extra cost, as often as you want. In this case, you can think of it almost like leasing a car.

Bad Credit or No Credit?

Rent-to-own will allow you to buy items without credit, so if you have bad credit or no credit, it will be much easier to sign up for a rent-to-own program rather than trying to get your new TV financed. With a rental center, they will not check your credit or base their decision on mistakes you've made in the past. This also means that it won't show up on your credit, so the plan won't hurt or help your current situation.

Certain rental centers, like Rent-A-Center, will allow you to purchase the item within 90 days or less with no interest charges. This means you can purchase an item with 0% APR over three months. If you can pay off the item within three months, then this may be a good idea for you.

What About Large Purchases?

If you can't qualify for a mortgage loan, a rent-to-own agreement will allow you to live in your dream home today, with the option to purchase it down the road. However, this can be a pitfall for renters and may end up costing you more in the end. (See also: 5 Things You Need to Know When Renting-to-Own a Home)

Rent-to-own can apply to vehicles as well. The agreement is similar to a leasing agreement, except the money you pay every week or month will go toward the eventual purchase price of the vehicle. Whereas with a leasing agreement, your payment does not go toward the purchase price and you need to return the vehicle at the end of the term.

Consider Layaway Plans Instead

Instead of signing on to a rent-to-own agreement, consider a layaway plan. With a layaway plan, you can split the cost up into payments that meet your budget until it is paid off. Generally, you will need to make a down payment (usually 10%–20% of the purchase price) and can then arrange payments on a weekly, biweekly, or monthly basis.

A layaway plan is almost identical to a rent-to-own plan, except you won't have to worry about the high finance charges, and with layaway, your item will stay in the store until you have paid it off. There is generally a small service fee involved, but it is nothing compared to the finance charges you would face with rent-to-own.

Do you have any positive or negative experiences with rent-to-own programs? Please share your thoughts in the comments!

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