Rent-to-Own vs. Buying on Credit

Jeanette A. Tucker  |  1/10/2007 7:08:24 PM

If you need furnishings and appliances but cannot afford the full purchase price up front, you can rent something, rent with the intent to purchase or purchase on a monthly installment plan. If you only want to use furniture or appliances for a few weeks or months, renting may be for you. If your intent is to own the item and you’re reasonably certain you can make the payments, a retail installment contract will get you the item at lower total cost than you would pay if you rent-to-own.

Rent-to-own purchase contracts are popular. They offer quick delivery with no down payment, low weekly payments with no credit check and no penalty for discontinuing the contract. For example, you can rent a television set by the week or by the month. Eventually, if you make enough payments, you will own the TV.

  • The advantage of rent-to-own contracts is that you can return the item and stop making payments if you no longer need or can no longer afford the payments. You are not obligated to continue payments and purchase the item once you have made the minimum number of payments required. The minimum number of payments will be specified and written in your contract.
  • There are two disadvantages of rent-to-own contracts. First, you pay more to own the item than you would if you had used a retail-installment contract, and second, if you miss a payment, you must return the item – you have nothing to show for your investment.

A retail installment contract (sometimes referred to as “buying on time” or “installment credit”) is an agreement to purchase an item by making a specified number of periodic payments; it is not a rental agreement. Part of each monthly payment is used to pay interest on the loan and part is used to pay off the principal (the balance due on your loan).

  • The advantages of buying on a retail installment contract are that you are investing in the item, and the total cost of the purchase will usually be less than it would be if you bought the item using a rental-purchase agreement. If you find you can’t make the payments and have taken good care of the item, you may be able to sell it to pay off the contract.
  • The disadvantage of retail installment contracts is that you are obligated for the full amount of the purchase agreement; you don’t actually own the item until all the payments are made. The merchant can repossess the item if you don’t make the payments. If the merchant cannot recover the amount due, you may be legally obligated for the balance of the loan, even though you no longer have use of the merchandise. If there is any surplus from the sale, you are legally entitled to that amount.

Compare Costs

Before you choose a purchase method, compare the total dollar costs of purchasing by cash, by retail installment contract and by rental-purchase agreement.

To check the total dollar cost, first multiply the number of required payments times the amount of each payment. Add any extra handling fees or service charges to that amount. For example, if your contract requires you to make 12 payments of $20 each and there is a $15 handling fee, then:

  • Number of payments: 12
  • Amount of payment: $20.00
  • Handling fee: $15.00

To Figure Your Total Cost:

  • 12 payments x $20 =    240.00
  • Add handling fee      +  15.00
  • TOTAL COST            $255.00

In this example, you must pay $255.00 before the rented merchandise belongs to you.

Things to know before you sign a contract

How much are your payments?

What is the total dollar cost to own the item?

When are payments due?

Is the merchandise new or used?
A rental contract must tell you whether the merchandise is new or used. If you are planning to eventually own the item, you will want to get the most use from it.

Is there a grace period for a late payment?

A grace period is the amount of time you have to get your late payment to the bank or the store before you have to pay a penalty or return the merchandise. Schedule your rental payments around payday when you are most likely to have the money available. If you miss a payment, the store has the right to repossess their merchandise. If a financial emergency arises, you may find you are out of luck.

For a rent-to-own agreement, you’ll want to know these things, also:

What other fees or charges are part of the contract?

Louisiana law requires that all extra charges must be stated in the contract. Read your rent-to-own contract carefully! Handling fees or service charges increase your total cost. Some rental stores may require you to purchase insurance on the rented item.

When do you own the merchandise?

In a rent-to-own contract, you will not own the merchandise UNTIL you have made ALL of your payments. Louisiana law requires the rent-to-own store to inform the consumer of the total number, the total amount and timing of all payments necessary for ownership.

Are you responsible for loss or damage to the merchandise?

The contract must state if you are liable for loss or damages to the rented item. It should also state that the consumer is responsible for the fair market value of the property as of the time it is lost, stolen, damaged or destroyed. The contract should include information on how you get an item repaired and who is responsible for the repair bills. Does the store provide a substitute or "loaner" at no extra charge while repairs are being made?

How do you reinstate a rent-to-own contract?

Guard your right to reinstate your rent-to-own contract. If you have made a substantial investment toward owning the item, you don’t want it repossessed and gone for good. Reinstatement means that within a specific time period, you have the right to pay all late payments. You will also have to pay all other charges to prevent your losing any rights or investments you have in the rental merchandise. Your right to reinstate your rent-to-own contract exists even if the merchandise has been repossessed.

In Louisiana, you can reinstate your rent-to-own contract within five days of the renewal date if you pay monthly or within two days of the renewal date if you pay more frequently. Reinstatement is made by paying the past due rental charges, the late fees, any applicable pick-up and delivery charges and any reinstatement fees.

If the consumer has paid less than two-thirds of the total payments necessary for ownership and has voluntarily returned or surrendered the property during the reinstatement period, the right to reinstate is extended to twenty-one (21) days after the date the property is returned. If the consumer has paid two-thirds or more of the total payments necessary for ownership and has returned or voluntarily surrendered the property during the reinstatement period, the consumer may reinstate the agreement during a period of (45) days after the return of the property. These extensions apply only if there is no judicial process. Upon reinstatement, the store is not required to return the same item you were renting. They can substitute merchandise of comparable quality and condition.

How many payments must you make?

A rent-to-own agreements will often have a minimum period of rental. So, when you take the item home you will have committed to a minimum payment of some amount. That amount is the amount of the periodic payment times the minimum number of periods. For example, if the minimum rental is four weeks and the weekly rental is $10 dollars per week, you will be obligated to $40, even if you return the item after two weeks.

References

Louisiana Rental-Purchase Agreement
Act. R.S. 9:3351 - 3362.
Bannister, R., Credit: Tool or Trap,
Ypsilanti, MI: Michigan Consumer Education Center
College of Education, Eastern Michigan University, 1989.

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