Rent-to-Own (RTO)

The rent-to-own business involves dealers that rent homes, furniture, cars, appliances, electronics, and jewelry to consumers. This arrangement provides the customer with immediate access to these assets for relatively low weekly or monthly payments.

In this article, we're going to cover the lease-to-own, rent-to-own, or RTO, industry.  Since this business sector has such a wide reach, from homes to electronics, we will not be going into the specifics of any one transaction.  Instead, we will provide generalized information on the RTO process.

Rent-to-Own Industry

An RTO arrangement is one in which a consumer enters into a lease agreement to make a weekly or monthly payment in exchange for immediate access to the asset.  These payments are self-renewing in that as long as the consumer continues to make payments, they have access to the asset.

A rent-to-own lease also has a purchase provision that allows the consumer to take permanent ownership of the asset after a pre-determined number of payments have been made to the lender or retailer.  Alternatively, the consumer may be able to purchase the asset earlier through the prepayment of a portion of the remaining lease payments.

Advantages and Disadvantages

The benefits of the lease-to-own business model flow to both the buyer as well as the seller of the goods.  Whenever entering into such an agreement, it's important that all the terms and conditions of the contract are understood by both parties.

To avoid any problems, even the smallest detail needs to be spelled out.  Although it may be commonplace in the industry that buyers are not responsible for maintenance or repairs, make sure these questions are asked, and answered, before signing any agreement.  Some of the more common benefits, and problems, with rent-to-own arrangements are listed below:

Advantages

  • Repairs:  if the rented property is in need of repair, then service is typically included at no charge.
  • Down Payment:  most agreements do not require a down payment, so the buyer has access to the property without making a large up-front payment.
  • Ownership Trial:  the RTO business model allows the renter to take temporary ownership of the property with the option of backing out of the transaction if they're dissatisfied.
  • Poor Credit:  as long as the renter keeps making his or her monthly payments, they're allowed to keep the property.  Credit report checks are usually not required as part of the qualification process.
  • Fixed Payments:  if the cost of the property (or the value of the home) increases, the renter is protected from increases to their monthly payments.
  • Price Protection:  contracts will state the purchase price of the goods, thereby allowing the renter to lock-in the price paid for the property.

Disadvantages

  • Fees Paid:  if the renter chooses not to buy the property, they could lose some, or all, of the fees paid.
  • Broken Deals:  renters may decide to back out of the deal and not purchase the property.
  • Missed Payments:  if the renter defaults on their monthly (or weekly) payments, then it may be difficult to repossess the property or home.
  • Total Cost:  the total cost to purchase the property may be higher with a rent-to-own arrangement.
  • Final Payments:  arrangements may include a balloon payment at the end of the agreement's term, and the buyer may not be able to afford this single payment.

Consumer Experiences

In early 1999, the Federal Trade Commission conducted a survey involving 12,000 randomly selected households and over 500 rent-to-own customers.  Participants in this survey were asked about their experiences with merchants.

Highlights of that study include:

  • Nearly 5% of U.S. households were involved in a rent-to-own transaction in the last five years.
  • Of the 67% of customers that stated they intended to purchase the merchandise when they entered into the agreement, 87% of these customers eventually purchased the merchandise.
  • Overall, the merchandise was ultimately purchased by all consumers 70% of the time.
  • When asked about their experiences with their transaction, 75% of customers stated they were satisfied.  Of the 19% of customers that stated they were dissatisfied with the transaction, the most commonly cited reason was price paid.

Consumer Protections

The biggest area of concern with a rent-to-own contract is the price paid by the consumer, which can sometimes be two to three times the retail price of the item.  Nearly all states have laws that regulate the industry in a manner that is consistent with the way standard leases are treated.  There are no specific protections offered to consumers under federal law.

Before entering into any agreement, the buyer should be familiar with the terms and conditions of the contract.  Specifically, the buyer needs to understand his or her obligation with respect to payments, total cost, fees, repairs, and penalties.

A simple rent-to-own checklist of understanding for consumers appears below:

  • Sales Tax Obligation
  • Property Taxes Payments
  • Annual Percentage Rate Paid
  • Delivery / Setup Charges
  • Application Processing Fees
  • Collections / Dunning Process
  • Repossession
  • Merchandise Condition (New or Used)
  • Amount and Date of Payments
  • Frequency of Payments
  • Total Purchase Price
  • Repair Cost Obligations
  • Early Purchase Options
  • Early Termination Options

 About the Author - Rent-to-Own (Last Reviewed on September 21, 2016)