Bad Credit: The Truth About Rent-to-Own Stores
It can seem so easy – get a 250GB Compaq laptop, a 42-inch JVC 1080p LCD flat panel TV and two HP wireless TV connect adapters for only $129.99 per month! How about a full 15-piece living room and dining set for only $119.99 per month? You could get a sofa, loveseat, coffee table, two end tables, a matching rug, a dining room table and six chairs. Best of all, there are no credit checks and they’ll even throw in free delivery and set up!
There are ads like these every week in your Sunday paper. The rent-to-own industry has grown into a multi-billion dollar industry since its start in the 1960s. Targeting low-income consumers, rent-to-own stores make it possible to have the nice things that other people have, without the credit restrictions. If you don’t have a good credit rating, where else are you going to be able to get that big screen high definition TV for your Superbowl party?
The problem is that rent-to-own stores take advantage of the current credit climate and charge the equivalent of 80% to 160% interest rates per year! In the example above, the laptop, TV and HP wireless TV connect would cost me $1949.99 to purchase from my local rent-to-own store. However, if you did not have two grand to spend right now, but you wanted the TV for the Superbowl, you could pay them $129.99 for 24 months and own it that way.
Well, let’s do the math shall we? $129.99 for 24 months equals a total price of $3119.76. That is an interest rate of 80% per year!
Now, that is at the store’s advertised prices. They are the ones that said the equipment was worth $1949.99. So, looking at their specifications, we did a little online comparison-shopping at Amazon.
An equivalent 40″ Philips 1080p LCD flat panel TV at Amazon is $672.71 plus $31.99 shipping.
The HP Wireless TV Connect is $152.86 with free shipping
The Compaq Presario CQ61-420US 15.6-Inch Laptop (which has similar specifications to the one advertised at Aaron’s) is $549.95 with $8.99 shipping.
GRAND TOTAL: $1,375.52 plus shipping.
So the rent-to-own store is charging $574.47 more than you would pay on Amazon. When you add that overcharge into the equation, you get an equivalent interest rate of 113.4% per year!
Right now, the average consumer credit card interest rate in the USA is 15.32% annually. If you were to make that purchase on a credit card it would cost you $67 per month to pay off the balance in two years. That is a total charge of $1608, of which only $233 is interest. That is a total cost of ownership that is almost $350 cheaper than the Aaron’s “Every Day Low Price” of $1949.99!
Unfortunately, the exorbitant cost of ownership is only one of the problems with rent-to-own stores. These stores do nothing to build credit. As you are not technically buying from them, they are not technically extending credit to you. Therefore, there are no reports of your good payment history to the credit bureaus and your credit score will not improve.
Another problem is that it does not matter how many payments you have made, you don’t own the items until you complete the entire term of the lease. So, lets say you have made 20 payments at $129.99 and you miss a payment. As you don’t own the items, the rent-to-own companies have every right to ask for them back. It does not matter to them that you have paid $2599.80 for items you could have purchased for $1375. If you stop paying, they will come and take it all away. In fact, only 25% of people that “purchase” from a rent-to-own store actually end up owning the things they buy. That means 75% of their customers make monthly payments on items and then end up giving them back. What does the store do with the stuff they get back? They “rent” it to the next customer!
That’s right! If you think you are going to get a brand new TV or washing machine, think again. With a 75% return rate, the chances are incredibly high that the products you get are used. Because you are renting these items, the companies do not have to tell you how many times these items have been rented before. The TV you get could have had two previous “owners” and the store might have already received over $1,600 for the product. Then they turn around and rent it to you for another $3,400 over two years and, if you complete the lease and actually end up owning it, they have received over $5,000 for something that you could have purchased for as little as $1375!
The profits to be made in this business are astronomical… and these companies love the current credit scoring system. Over 25% of Americans have a credit score of less than 600 and would not be able to get a credit card to buy the things they want. As long as that situation continues to exist, these companies will have a dedicated market. So, don’t fall victim to the rent-to-own scam and start building a great credit score today.