Rent-to-Own vs. Credit Cards: Which Costs Less?

What if you need a new TV, sofa or even a set of tires, but you're broke? Do you turn to a credit card or a rent-to-own store?

If you don't have that handy piece of plastic or are already drowning in card debt, rent-to-own might sound like a good solution, but consumer advocates say stay away.

"Renting to own furniture, appliances or even car hubcaps -- that's the newest thing -- is a bad idea," says Ed Mierzwinski, federal consumer program director for the nonprofit advocacy organization U.S. Public Interest Research Group. Rent-to-own is a type of predatory lending, he says. "The business model is to promise ownership, then take it away."

That's because many, although not all, consumers who use rent-to-own don't have access to credit due to poor or thin credit files. They may be unbanked or have irregular income sources, making it hard to save or make regular payments consistently. Fail to pay on time just once and experts say you might have employees from Rent-a-Center, Aaron's or your local mom-and-pop RTO store showing up to take the merchandise back.

The money you sunk in? It's gone, unless you can begin making payments again to get the item back. "Their technique is to collect rental fees forever," Mierzwinski says.

Richard May, the public affairs director for the industry trade group the Association of Progressive Rental Organizations (APRO), says rent-to-own stores serve consumers who need a new item now, don't have the money to buy it outright and either can't or don't want to use credit.

"That's a unique niche that rent-to-own fills," May says.

How does rent-to-own work? If you're wondering what it's like to rent to own, here's a step-by-step rundown of how it works:

In a best-case scenario, you'll eventually make the final payment and the item will be yours. At that point, you'll likely have paid double or triple what you'd have spent buying the same item with cash at a department store, big-box store or online, according to Consumer Reports. (Story continues below.)

Rent-to-own pitfalls (and perks) Consumers can use rent-to-own to buy products ranging from tires and rims for a car, to a new washer and dryer set, to a tuba for little Timmy, to a diamond engagement ring. The $8.5 billion industry has about 9,800 stores across all 50 states that sell to 6 million customers a year, according to APRO.

And, APRO says, rent-to-own offers many perks to consumers: no long-term obligation, the ability to return an item at any time, loaners during repairs and inclusion of delivery, set-up and pick-up of the merchandise. Depending on the state law and the company, a consumer who loses an item due to payment problems might be able to get the contract reinstated, with credit for past payments.

"There's no credit extended, you don't go into debt. And if at any time you don't want to make the next payment, you can call the store and say, 'I don't want it anymore. Come and get it,'" May says.

That leads to lack of consumer protections, he says. For example, in many states RTO companies are not required to disclose APRs, Mierzwinski says. A survey of prices at five RTO stores in March 2013 by Wisconsin Public Interest Research Group (WISPIRG) found an average effective APR of 221 percent, and some APRs as high as 370 percent, according to a WISPIRG report.

RTO stores try to get even more money from customers by "upselling" them on high-priced warranties, theft insurance and other products they don't need. "They bait-and-switch you into buying this, that and the other thing," says Mierzwinski.

Also, the industry has been accused of unscrupulous collection practices, says Anthony Giorgianni, a writer for Consumer Reports who investigated the rent-to-own industry.

For example, national chain Rent-a-Center in 2010 denied allegations but settled a lawsuit brought by the Washington state attorney general's office for illegal collection tactics that included banging on doors, swearing and threatening to have customers thrown in jail.

Saying no to RTO? What to do instead

"It's only a good idea for consumers who have an actual short-term need," Mierzwinski says.

But consumers considering RTO due to a difficult financial situation should look at alternatives, says Giorgianni. Experts say there are three main options:

Save up for the purchase. This is the best choice, consumer advocates say. By putting money aside and then shopping around, you'll save in two ways: by finding the best deal on the item you want and by not spending extra to pay over time.

Pay with a credit card. Even if you use a high-interest card, you'll pay much less than with rent-to-own, Mierzwinski says -- as long as you pay more than the minimum amount due each month. For example, a consumer who uses a card with 29 percent interest to buy a 32-inch LED TV at Best Buy, and pays the same amount monthly that they'd shell out for a 12-month RTO contract, would have the TV paid off in six months and would save $600. (See chart.) When using a credit card with 18 percent APR, consumers could pay less than half and often about a quarter of what they'd pay with RTO contract, according to the WISPIRG report.

Downgrade. Some experts recommend hitting yard sales, going to Goodwill or looking on Craigslist, but Mierzwinski says these choices open up other concerns about the best way to buy a used product. Another option, he says, is to opt for a new product with fewer features.

But, whatever you do, steer clear of RTO, Mierzwinski says: "Renting to own is just going to get you deeper in debt."

What to know before jumping into a rent-to-own lease