Are There Better Options Than Rent-to-Own?

"You can take home a brand-new, 42-inch flat-screen today for only $25 a week!” Sound familiar?

Looks can be deceiving, especially in the world of rent-to-own, where consumers can end up paying double or triple the normal retail price to purchase goods.

Nevertheless, the industry is going strong, with 4.8 million customers and $8.5 billion in annual revenue in 2012, according to the Association of Progressive Rental Organizations, an industry group.

What’s the Attraction?

Why do people shop at rent-to-own businesses?

• If you have bad credit or no credit, no problem. Approval is practically guaranteed.
• Because most rent-to-own companies don’t report to the major credit bureaus, your credit won’t be damaged further if you fail to make timely payments or pay at all. On the other hand, a record of timely payments will do absolutely nothing to improve your credit score.
• There’s an illusion of affordability. That expensive bedroom set you want seems within your reach when you’re looking at only the low monthly payments. Says Credit.com’s Gerri Detweiler, “The trap with rent-to-own items is the same trap we fall into with credit cards -- focusing on the minimum payment and not the total cost.”
• They offer convenience and flexibility. The approval is usually rapid, and many major rent-to-own outlets deliver. To make the deal even more appealing, they grant you the ability to modify the agreement over the duration of the contract -- but that could come at a cost. If you chose to drag the the payments out, you could be overpaying even more.

How Many Get Stuck

In 2011, Consumer Reports conducted an extensive investigation of rent-to-own stores. It said:

Consider the deal for a $612 Toshiba laptop computer we found at one rent-to-own store. It was being offered at $38.99 a week for 48 weeks, for a total of $1,872, excluding sales tax and other charges. That’s the same as buying the laptop at the manufacturer’s suggested retail price and financing it at an interest rate of 311 percent. You could buy three of the laptops outright for that $1,872.

CNN Money reported last year:

At Buddy’s Rents, for example, you can rent-to-own an LG 42-inch plasma TV for as little as $22.99 a week. You can return the TV any time if you don’t want to keep it. But in order to own it, you need to make 78 payments or a total of $1,793. That compares to a retail price of $446 on Amazon.com.

This is fairly standard for rent-to-own agreements. In most cases, making enough payments to actually own the item will cost you more than double the amount it would cost to buy it upfront from a traditional retailer.

Last year, Kmart decided it wanted a piece of the rent-to-own pie. Says Bloomberg:

The Lease-to-Own program touts instant gratification -- customers without credit take a product home right away, make biweekly payments, then decide whether to buy out or return the product. A typical deal could turn a $300 television into a $415 purchase.

Your Alternatives

Rent-to-own may work well for someone who only needs to furnish an apartment for a short amount of time. But if you want to buy furniture, electronics and the other items that are often sold at these stores, there are much better alternatives.

And, says CNN Money, the last government study on the issue, from 2000, showed that 70% of rent-to-own customers end up buying the items they’ve taken home from rent-to-own stores.

• Be patient. Save the money you would have paid to the rent-to-own store until you have enough to purchase the item at the regular price.
• Wait for a sale. Better yet, save your money and then purchase the item when it goes on sale.
• Buy refurbished. There’s nothing wrong with refurbished items and they come at a greatly discounted price. See: “Refurbished Electronics 101: How to Save Up to 50 Percent.”
• Buy secondhand. Try Craigslist, yard sales, consignment shops or thrift stores. Even if you have to take care of the delivery, you could end up saving a bundle.
• Boost your credit score. If you have to finance the item, take some time to build your credit score and then apply for a credit card with a 0 percent interest introductory offer.

If you go to a rent-to-own store, how can you protect yourself from a really bad deal? Forty-seven states have various consumer protections in place. But take these steps:

• Cash price vs. rental price. Search online for the retail price of the item you are considering renting. Compare that with the total cost at the rent-to-own store, including the monthly payment, down payment and duration of the agreement.
• Read the contract. You need to understand every detail.
• Condition. Is the item at the rent-to-own store new or gently used?
• Hidden fees. Are there any penalties associated with late payments, early returns or premature payoffs?
• Reporting practices. Although it’s uncommon, ask if the store reports payments to the three major credit bureaus.

This post originally appeared on Money Talks News.

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