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Does renting to own ever make sense?

A rent-to-own plan is an expensive alternative for people with bad credit, and it won't help them improve their scores.

By MSN Money Partner Oct 3, 2012 5:53PM

This post comes from Christopher Maag at partner site logoUnder normal circumstances, Amy Willingham would never buy furniture from a rent-to-own store. After all, getting furniture and electronics on a rent-to-own contract is usually much more expensive than buying goods from a traditional retail store.


Image: Overwhelmed woman © CorbisBut Willingham had a special reason to go the rent-to-own route: poor credit, and the lure of boosting it. Someone at a national chain of rent-to-own stores told her that the company "will report your positive credit once you have made six diligent payments," Willingham said in a recent response to a story. "I got furniture from them just for that reason."


Willingham made six on-time payments, and then asked the store manager about reporting them to the three national credit bureaus. "He balked," Willingham says.


That makes sense, especially because the company's website explicitly states that no credit is needed to make a purchase, and no credit check is involved. In fact, the industry exists specifically to help people who have been shut out of mainstream credit, says Richard May, a public affairs director for the Association of Progressive Rental Organizations, a rent-to-own industry trade association.


"The credit world is the reason why rent-to-own exists," May says. "These customers were rejected (for credit), so they have nowhere else to go. With rent-to-own, you never go into debt, and you never have to make the next payment."


Which means that any salesman who promised a boost in credit scores from a rent-to-own purchase was probably embellishing the facts to try and make the sale, says Barry Paperno, a credit scoring expert and's community director.


"They don't report to credit bureaus, period," May says.


Rent-to-own customers agree to make weekly, biweekly or monthly payments. If they make all the payments, they get to keep the item. If they miss a payment, the store can repossess the item or items. But unlike a repossessed car or a foreclosed home, that repossession is not reported to the national credit bureaus, so it has no impact on the consumer's credit scores.


"With debt, if you don't make that next payment, you get into trouble," May says. "With rent-to-own, you never go into debt, and you never have to make the next payment."

There are about 8,600 rent-to-own stores in the United States and Canada, according to ARPO. The number of rent-to-own customers has grown from 3.3 million in 1998 to 4.1 million in 2010, and the industry's annual sales have grown from $4.7 billion to $7.6 billion over the same period, the association says.


Meanwhile, rent-to-own retailers are consistently criticized by regulators and consumer advocates. Customers who ultimately purchase items from rent-to-own stores (as opposed to renting for a while before returning the goods) wind up paying two to three times more over the life of the contract than they would have by simply buying the same things outright at retail price, according to congressional testimony last summer by the Federal Trade Commission (.pdf file).


Most consumers find themselves paying too much, since 70% of rent-to-own customers eventually purchase their rented items, the FTC found.


Other customers complain that the rental contract wasn't adequately explained, that used merchandise was advertised and sold as new, and that they were treated poorly when their payments were late or when the merchandise was repossessed, the FTC found.


"(T)hese sales are made at astronomic, and undisclosed, annual percentage rates," according to Americans for Financial Reform (.pdf file), a coalition of consumer advocate groups. "Under most RTO contracts, the customer will pay between $1,000 and $2,400 for a TV, stereo, or other major appliance worth as little as $200 retail, if used, and seldom more than $600 retail, if new.


Industry representatives acknowledge the high costs.


"You can wind up paying two to 2.5 times the retail price," May says. 


All of which means that in most cases, and for most consumers, buying on a rent-to-own plan is the wrong way to go, credit experts say.


"I have a hard time thinking of a situation where rent-to-own is a good idea," says Gerri Detweiler,'s consumer credit expert.


Rent-to-own does offer some advantages, though, especially if a consumer needs furniture only for a short time. For example, if someone's employer or client is planning to send her to a different city for a few months to work, rent-to-own might be a quick way to furnish an apartment and make such a stay comfortable, Paperno says.


"If money is no object, and you're just looking for a convenient way to get furniture for a temporary residence, then it might make sense," Paperno says.


The industry acknowledges that short-term rentals are the way to go.


"The fewer payments you make and the less time you make them, it's not that expensive," May says. "The longer you go, the more it's going to cost."


Rent-to-own might also make sense for consumers whose income is unsteady, says May. If a person is worried about a pay cut or a layoff, a rent-to-own contract could help them get furniture without putting the items on a credit card, since any unpaid credit card bills surely will hurt credit scores.


"It makes sense to different customers, including those who have unsure financial stability," May says. "It all comes down to the premise of that no obligation, no debt."

But for someone with unstable income, paying too much for furniture now could cause more serious financial stress later. Most shoppers can easily find cheaper options on websites like Craigslist.


If she could do it over again, Willingham says she certainly would have made a different choice. The process of paying too much for furniture, with no help for her low credit scores, "made me wish I would have gone elsewhere to purchase furniture," she says.


 More from and MSN Money:

Oct 5, 2012 11:57AM

What ever happened to just saving up your money and then buying what you need as you have the money?  When my wife and I got married 42 years ago, that is what we did.  You start out buying the things you need most taking into consideration the cost of every item and time needed to save.


With few exceptions like maybe a temporary job stay or something like that, I can see no justification for rent to own schemes.  All it does it keep you poor.

Oct 3, 2012 10:54PM

I'm surprised "debt collection" didnt hit top of the list. Debt collection has become one of americas most profitable and fastest growing businesses.  They work out of a safe house " which is known as the house of law" almost impenetrable.  They lobby the legislature so they can keep the state laws on the creditors side instead of the struggling debtors. Big banks are profitting and double dipping from both ends 1.  from unucle sam (in the name of bail outs) then by using collection firms 2.  owned and operated by attorney's ( in the name of law) .....

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