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If you rent to own, you pay too much

Considering a rent-to-own purchase? Consumer advocates say you should reconsider.

"My advice in one word: don't," says Mark Oleson, director of the Iowa State University Financial Counseling Clinic. "The cost is extraordinary."

While rent-to-own stores offer convenience, no credit check and no long-term commitment, consumer groups say the math is the main reason to just say no. Rent-to-own customers commonly pay two- to five-times retail, according to a survey by the U.S. Public Interest Research Group, a consumer advocacy organization.

"Consumers should be looking at the total cost of purchasing rent-to-own, not just the low weekly or monthly payment," says James M. Lacko, economist for the Federal Trade Commission.

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For a class demonstration last year, Oleson got an estimate on a new computer from a local rental store: $32.99 a week for two years. Total cost: $3,431.

Then he went to Staples and found a more powerful model for $800. When Oleson did the math, he figured that a customer could take advantage of the 18 percent annual percentage rate credit line that Staples was offering, make the same payments as the rent-to-own store required -- and have the computer paid off in seven months for $845.25 Total savings: $2,586.

So why rent to own? "I can't think of a good reason to do that," says Oleson.

But the industry is popular with consumers and produced revenues of $5.2 billion in 2001, according to a survey by the Association of Progressive Rental Organizations, a trade group that represents about half the rent-to-own industry.

"People don't go to a rent-to-own [store] for price," says Richard May, the organization's public affairs director. "They go because there are uncertainties in their lives."

The big appeal, May says, is that a rental contract allows buyers to "keep their options open."

According to a survey by the FTC, 59 percent of customers come from homes with an annual income of less than $25,000, while 73 percent have a high school education or less.

Because rent-to-own transactions are not treated as credit -- technically consumers don't own the item until they have made the last payment -- the fees that they pay over and above the cost of the merchandise aren't regulated by usury laws. If they were, consumer advocates argue, then consumers would see that they were financing their purchases at triple digit rates.

"They don't understand how deep in debt this puts them and for how long," says Tom Collens, vice president of operations for the Consumer Credit Counseling Service.

But industry advocates counter that rental purchases shouldn't be treated as sales because only 25 percent to 30 percent of the transactions result in a sale. A survey by the FTC put the number at 70 percent.

Presently, no federal legislation governs rent-to-own transactions. An industry-backed bill currently under consideration (H.B. 1701) is controversial because consumer groups fear it would weaken rent-to-own regulations in some states.

How it works
Each year, 3 million consumers enter rent-to-own contracts, and most are pleased with the arrangement. The FTC survey found that 75 percent of rent-to-own customers were happy with the experience. Their No. 1 complaint: the cost.

With rent-to-own transactions, customers make weekly, biweekly or monthly payments for their merchandise. The interval is most often dictated by their paycheck, says May.

While companies don't check credit or ask for a deposit or down payment, they will ask for several personal references and check employment, says May. They will also check to see if a customer has ever skipped out on a rent-to-own agreement in the past. The skip rate is 1.5 percent, he says.

If you have your heart set on rent-to-own merchandise, be sure to nail down the fine print. Exactly how much are the payments? Does that include tax? Are there any add-on fees?

Find out exactly when payments are due, if there is a grace period and what the late fees are. Some companies will personally collect late payments -- a convenience or a hassle, depending on your point of view. But often there is a charge for such personalized service on top of the late fee.

In addition, find out if a late payment will void the contract. If it does and you want to reinstate your rent-to-own agreement and avoid losing the money paid thus far, what's the charge? And if you decide you don't want the item any more, is there a return fee?

Read the contract to discern who is responsible if the merchandise is broken, lost or stolen. By law, the person who owns the object -- in this case the store -- would be responsible for it, says Margot F. Saunders, the managing attorney for the National Consumer Law Center, a nonprofit law firm. But the rent-to-own contracts she's seen shift the burden to the person renting the goods.

Stores often offer a damage waiver to protect the consumer from liability for a few dollars extra per payment.

What if the merchandise is a lemon -- the computer crashes, the washing machine floods or the VCR won't record? That, says May, is the beauty of rent to own. Call the store, and they will bring you a loaner while they repair the original merchandise.

If you expect new merchandise, get a promise in writing. Such a request should be included in the contract, says May, and the item should be delivered in the box with all the manuals and information.

As with any transaction, smart consumers read a contract completely before they sign. If what you're reading is different than what you are being told, remember the written word is what's binding. Either have someone change the contract or shop elsewhere.

If you need things and don't want to go the rent-to-own route, you have options. Instead of buying new merchandise right away, buy yourself some time. If your credit cards are maxed out and your savings account is empty, it pays to ask yourself, "How much do I need that new TV?" says Oleson.

A better bet for consumers on a budget might be to pay down a credit card and charge the merchandise.

But what if the item in question is a must-have, like a refrigerator or a washing machine? At that point, Oleson says, consumers might be better served financially to ask for a credit limit extension, or see if they can qualify for an in-store credit card with a department or discount store. Usually a 26 percent APR credit line is ultimately cheaper than purchasing through a rent-to-own store.

And then there's the old standby that no one wants to consider: saving. Put the rent-to-own payments in a piggy bank, wait a few months and pay cash.

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: June 11, 2002

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