Imagine a store where you can pay as you go with no credit and get brand-name furniture, appliances and electronics for as little as $19.99 a week.
That’s the marketing pitch for rent-to-own companies, which tout low prices, no hassles and instant gratification to cash-strapped consumers.
If you’re considering a rent-to-own deal or are already in a contract, here’s what you need to know.
How rent-to-own works
You may rent from a well-known national chain, but the contract you sign is usually with a third-party leasing company, not the store itself. That means payments, repairs, returns and other services are handled by that company, not the store.
You usually make payments for a fixed introductory period, which can be a few months. After that, you have three options: you can choose to buy the item outright; continue making payments until you own it; or return the item at any time to end your lease.
If you stop making payments or fall behind, the leasing company can repossess the object and you don’t have the right to get your money back.
You don’t need good credit to rent an item. Most rent-to-own companies typically require only a source of income, a place of residence, and references from people who know you. The leasing company may pull your credit report to verify who you are, and it may or may not report payments to the credit bureaus. If it does, the information could show up on your credit report.
You may have cheaper options than rent-to-own
Rent-to-own may seem cheap, but in practice it costs as much as payday loans, car title loans and other expensive forms of lending, with effective annual percentage rates typically north of 200%.
Even if you have a troubled credit history or can’t pay the full purchase price for something you want, there can be cheaper options than renting to own. Store layaway, subprime credit cards and bad-credit personal loans all give you time to pay off the purchase at APRs below 36%.
Before you sign a contract
The Federal Trade Commission suggests you ask these questions before choosing rent-to-own:
How much are my payments?
When are they due?
What other fees are charged and how much will my payments be with these charges?
What is the total cost to own the item?
When do I own the item?
Is the merchandise new or used?
Can I pay off the item early to save money, or is there a penalty?
Am I responsible for loss or damage to the item?
Who pays for repairs if the item breaks down?
Is there a grace period for late payments?
What happens if I miss a payment?
If I miss a payment or am late and the property is returned or repossessed, how long do I have to reinstate my payments and agreement? How much and what types of charges must I pay in addition to all my past-due payments?
Once you sign a contract
There are several ways you can protect yourself if you’ve signed a rent-to-own contract.
Keep your payment records. Some major rental companies have had issues with crediting payments properly.
Pay on time. Missing a payment, even by a single day, can trigger a deluge of calls from rental companies. The further behind you get, the more aggressive the companies become.
Know your rights if your account is sold to a debt collector. The Fair Debt Collection Practices Act prohibits debt collectors from using abusive, unfair or deceptive practices to collect on debt, including calling customers continuously with an intent to harass.
If you’ve been harassed over unpaid bills, you can file a complaint with your state’s attorney general. Or if you feel threatened, you can contact your local law enforcement.
Consider negotiating a lower payoff. Debt collectors that acquire unpaid debt from rental companies will typically ask you to pay the “early purchase option” on your contract. But savvy consumers can talk them down to half of that amount paid over multiple months.