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.
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.
- 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."
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