Sale-leaseback: A dangerous new form of consumer debt

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Call it a loan or call it a lease. Whichever name you give it, the sale-leaseback is a dangerous, high-priced debt.

Consumer advocates call the sale-leaseback a terribly overpriced loan that should be regulated. Proponents argue that a sale-leaseback is not a loan and that it shouldn’t be regulated.

Sale-leasebacks occupy an uneasy ground between payday loans and pawnshop transactions. Sale-leasebacks are common in Texas because the Lone Star State closely regulates payday lenders and pawnshops, encouraging businesses to come up with creative ways of lending money without admitting that they’re lending money. The transactions have made appearances in other states, especially in the South.

Sale-leasebacks attract controversy. The nation’s biggest chain of pawnshops refuses to get into the sale-leaseback business. CashAmerica International, which operates 415 pawnshops in 18 states, recently entered the payday loan business, but declines to offer sale-leasebacks.

Sale-leasebacks, says spokeswoman Mary Jackson, are “coming from a perspective of surviving on the outskirts of the law.”

She adds: “Being a publicly traded company and the largest in the industry, we’re only going to work with a regulated product. We don’t want to be involved in transactions that circumvent laws.”

‘Surrender the appliance’
But other pawnshops and rent-to-own stores have embraced sale-leasebacks. They work like this:

You go into the store and apply for a cash advance. On the application, you write the serial number of an appliance, such as a television. You agree to transfer ownership of the appliance and rent it back.

Let’s say you’re borrowing $200. You write a $200 check — the money you’re borrowing — and a check for $66 to cover the rental of your appliance for 15 days. The store immediately deposits the $66 check and holds the $200 check. You get $200 cash.

Fifteen days later, you can bring in $200 cash to “repurchase” your appliance and get back your $200 check. If you can’t bring in $200 cash, you can renew your “lease” and pay another $66 to rent the appliance for 15 more days. If the transaction were called a loan, the interest rate would be almost 800 percent.

The sale-leaseback looks like the much-maligned
payday loan. The difference is the requirement that the consumer write down an appliance serial number. The business that advances the money seldom, if ever, demands proof that the appliance exists or that the customer owns it.

“They tell us what it is they’re selling us and we base the assessed value on the description,” says Laurie Davis of Imperial Leasing, a Dallas company that offers sale-leasebacks. “We explain that they have to own it outright.”

Davis says the transaction is not a loan because her clients have no obligation to repay: “They do have the option to surrender the appliance.”

Critics say sale-leaseback companies sometimes refuse appliances as payment. Instead, they threaten to deposit the checks they are holding.

Rob Schneider, an attorney with Consumers Union’s regional office in Austin, Texas, says it is “coercive” for sale-leaseback stores to hold the client’s checks because they can deposit the checks. Then the client either goes through a cash crunch or has to pay bounced-check fees and dodge bill collectors.

The real collateral is the personal check, not the appliance, he says.

“Obviously the consumer doesn’t believe they are leasing a personal appliance, since they own the appliance in the first place and it never leaves their home,” Schneider told a state House committee. “Instead, consumers perceive sale-leaseback transactions to be personal loans and the ‘rental payments’ to be interest payments.”

Davis, on the other hand, says it’s clear that a sale-leaseback is not a loan. “It’s an alternative,” she says. “It’s a lease. It’s an alternative financial resource. It’s not a loan because there’s no obligation to pay.”

Sale-leasebacks of consumer appliances are a relatively new wrinkle. In similar transactions called auto title loans, the borrower transfers title of a vehicle to the lender and then “leases” the vehicle back. In the business world, sale-leasebacks have a reputable history. Typically, they allow small businesses to raise money to pay for expansion by selling property and renting it back.

Leslie Pettijohn, Texas Consumer Credit Commissioner, recommends that people avoid costly loans and cash advances when possible. That sounds like obvious advice, but consumers by the millions ignore it. Borrow from relatives or friends, or get a small loan from a credit union if you belong to one, she advises. Or take a cash advance on a credit card — the interest rate will be high, but not as high as a payday loan or sale-leaseback.

Or, Pettijohn says, hock something at a pawnshop. “It doesn’t trap them in a spiral,” she says. “They do forfeit the item in the pawnshop, but there are no consequences for forfeiting the item.”