What is rent to own?
Rent to own (or lease purchase) allows people without the cash to make an immediate purchase to use things or property while paying for them. So, unlike a lay away plan, the consumer gets to use the item while paying for it. These contracts can be used to purchase almost anything. They can be applied to homes, computers, cars, TVs, or washers and dryers. When a buyer makes a purchase using rent to own, generally, the buyer makes a fixed monthly payment. Part of that payment counts as rent and part of that payment goes toward the purchase price. Depending on how much of the payment counts toward the purchase price, this can be either a really good deal for the buyer or can mean that the payer is paying a lot of money for the privilege of using the product while paying it off.
Example of Rent to Own
Let’s look at an example. Sam Seller owns a car that he wants to sell. Bob Buyer wants to buy the car, but cannot get a bank loan to pay for it. Both agree that the car is worth $2000. Since Bob Buyer cannot get credit, that could be the end of the deal.
But there is another option. The two of them could enter into a rent to own contract for the car. Bob Buyer could immediately begin driving the car. Bob Buyer agrees to pay $200 per month for the car for 20 months. Each month, $100 will count toward the rental of the car and the other $100 would count toward the purchase price.
So, over the course of the contract, Bob Buyer would have paid $200 per month for 20 months, for a total of $4000. This is the major concern that consumer groups have with these kinds of contracts. That is, the amount paid over the actual retail price of the item is generally much more than would have been paid as interest in a transaction. Others argue that for many this is the only available alternative.
The purpose of this website is not to suggest who is right. We just want to help our readers make informed decisions with their finances.