Rent to Own Hazards
When the buyer decides to rent to own or lease purchase, it is normally because the buyer lacks either the cash or the credit (from a bank loan or a credit card) to make the purchase outright. And in that circumstance, it might make financial sense to do so. However, there are a number of potential hazards that a buyer should consider before choosing to enter into this type of a financing arrangement.
Read the Contract
Read the contract carefully. Because this is fundamentally a contractual arrangement between the buyer and the seller, in most circumstances, the rights and responsibilities of both parties will be governed by the language of the contract. That can have enormous consequences for the parties. For example, the contract may contain a provision that sets the proper court for any dispute in a venue far away. That would result in higher legal expenses and might preclude the party from handling the claim themselves in small claims court.
Understand Impact of a Default
Know what happens in the event of default. Obviously no one enters into a contract without expecting to comply with its terms. But what if something happens and you miss a payment? What happens to the money that you have built up over time? Is it lost? Are you entitled to recover any of it? Generally, this is governed by the contract, but may be governed by local state laws.
Understand the Interest
Think about how much you are paying in “interest.” While these kinds of contracts may not expressly state the interest rate, they can be extraordinarily onerous on the buyer. For example, let us return to our hypothetical between Bob Buyer and Sam Seller and the $2000 car. The agreement between them provided that Bob Buyer would pay $200 per month for 20 months to own the car because only 50% of the monthly payment was applied to the ownership of the car. In that situation, Bob Buyer would end up paying $4000 for a $2000 car, or $2000 in “interest.” If the $2000 car were purchased with a credit card charging 20% interest and the same $200 payment were made, the car would be paid off in 11 months and only $167 in interest would have been paid. So, while there may be situations where this makes sense, it can be enormously expensive.