RTO homes are different than RTO department stores. With RTO homes, a portion of the monthly rent is credited toward the future purchase of the house. The buyer is also required to pay an upfront option fee, which is also credited to the purchase of the house. If the buyer decides not to buy the house, then he loses both the rent credits and the option fee.
Unlike RTO department stores, the eventual purchase of a RTO home does involve credit checks and a conventional mortgage. Learn more at How Rent-to-own Homes Work.
Cheap to Rent, Expensive to Own
If you want a giant plasma TV for the big game and know that you will return it promptly on Monday morning, then shopping at a RTO store makes perfect sense. For $30, you can enjoy a new, high-quality piece of equipment with no strings attached.
But if your intent is to buy that giant plasma TV and use it for years, then RTO is one of the worst deals around. According to a report by the Federal Trade Commission, 70 percent of RTO merchandise is eventually purchased [source: FTC].
To understand why RTO is a raw deal, let's take a look at the numbers. The RTO store Colortyme advertises a 42-inch (106.7-centimeter) Hitachi plasma TV for 91 payments of $28.99 a week. So if you want to own that TV, you'll pay a grand total of $2,638.09. For comparison, the same TV sells for $949 on Amazon.com plus $113 for shipping.
Here's another example. To buy a Dell Inspiron 530s computer with a 22-inch (55.9-centimeter) monitor from Colortyme, you'll pay $33.99 a week for 91 weeks, a total of $3,093.09. If you bought the same computer directly from Dell.com, it would cost you $799.
Now it's true that few people would pay cash for these items, so let's look at how RTO compares to buying with a credit card. Let's say you have a credit card that carries a relatively high 18 percent interest rate (APR). And let's say that you take 91 weeks to pay off the balance on that $799 computer. You would still only pay a total of $937.44 for the computer. When you break it down by monthly payments, you'd spend $44.64 each month with a credit card and $135.96 a month with the RTO plan.
Back to our question: Is rent to own cheaper than buying? Absolutely not. In the long run, you can end up paying upwards of three times more than retail by using a RTO payment plan.
The RTO industry has come under fire in recent years for violating state usury laws. In 2006, the New Jersey Supreme Court ruled that Rent-A-Center was breaking the law by charging more -- in many cases far more -- than 30 percent interest on its merchandise [source: Burtka]. The court disagreed with Rent-A-Center's argument that its payment plans did not constitute a credit sale [source: FTC].
Even though the RTO industry has been accused of profiting on financial ignorance and gauging the poor, others argue that RTO plays a valuable role for a marginalized segment of the population. If somebody doesn't have any credit, but really wants a nice computer, then he or she should be free to choose RTO as a payment option, knowing that it might cost significantly more in the long run.
Ron Burley of AARP magazine has some advice for people who choose to shop at RTO stores:
- Read the contracts carefully. Understand the payment structure and the total price of the merchandise.
- Some RTO stores now offer biweekly or monthly payments that may carry lower interest rates. Ask about them.
- Ask about an early purchase option in which you agree to pay a set price for the item if you can come up with the cash in 60 to 90 days.
- Insist on a lifetime-reinstatement clause, so that even if your item is repossessed, the money you've already spent is credited toward future rental of the same item. [source: Burley]
For more information on credit, debt and personal finances, follow the helpful links on the next page.