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What is Rent to Own?

A person with a poor credit history can usually enter into a "rent to own" agreement with proof of steady employment.
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  • Written By: Michael Pollick
  • Edited By: Niki Foster
  • Last Modified Date: 06 October 2014
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For many consumers with poor or nonexistent credit histories, owning big ticket items such as furniture, electronics or cars can seem like a pipe dream. Qualified buyers can often get low-interest loans from banks to finance these purchases, but others can only qualify to pay high-interest rental prices every month. There is no sense of ownership under traditional rental agreements. If the renter cannot make the rental payment, the item is repossessed by the owner.

This seeming inequality between renters and buyers led to the development of the rent to own business model. This arrangement starts off as a traditional rental agreement, but the two parties agree to transfer ownership at the end of a specified period of time. The seller benefits from the higher monthly interest rates paid for the item, while the buyer benefits from the less restrictive credit qualifications. A consumer with a poor credit history can usually enter into such an agreement with only a few references and proof of steady employment.

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Critics of the rent to own system point out that the buyer is often forced to pay an interest rate bordering on illegal usury. A $500 US dollar (USD) television set, for example, might end up costing the buyer nearly $1,200 USD in total payments. Since these monthly payments are usually smaller than equivalent bank loans, the buyer doesn't always feel the pinch. The seller can afford to take an occasional loss as long as those who remain in the program continue until the end. Repossessed items can always be sold again.

Not all rental companies offer rent to own plans. Many of their customers are satisfied with paying monthly rental fees instead of worrying about making payments on bank loans. Rent to own arrangements tend to appeal to those customers who would have great difficulty obtaining household loans from a bank, but don't want to keep paying for property they will never own. Despite the higher interest rates and unfavorable conditions, these customers will eventually assume ownership rights to their purchases. The alternative might be to buy inferior or used goods with available cash, or enter into other high interest loans with lending institutions.

Some products, such as furniture and electronics, lend themselves well to rent to own arrangements. The quality is usually high and the total number of payments required for ownership is low. The danger comes with very expensive items such as plasma televisions, jewelry or cars. The number of payments required for ownership may be excessive, and repossession may prove especially costly. Rent to own arrangements are not illegal, but consumers should be aware of all the hidden costs and conditions before signing on the dotted line.

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BrickBack
Post 4

Moldova-That is a good idea. I have to say that sellers resort to rent to own homes as a last resort because they need to sell their home but can’t.

You will know that this is the case when you see a for rent and a sale sign on the same house.

Here clearly the seller is distressed and this is why they making their home a rent to own house.

In some cases, the seller will even finance the buyer. This happens when the buyer may not qualify for a loan because an insufficient down payment.

I think that accepting rent to own homes are risky because of the fluctuations in the real estate market.

The only way that it would work is if you loved the location and the house itself and could see yourself living there long term.

Moldova
Post 3

Crispety-I agree that is what happened to my mother-in-law and she has an attorney looking over it. I think that rent to own furniture in order to stage a property is a smart decision.

Often realtors will say that furnished homes free of clutter sell best. Buyers do not like to see empty properties and the rent to own furniture works great with rent to own homes.

The only area that I do not agree that it is worth it is with respect to rent to own appliances and rent to own electronics.

Here you are paying outrageous rates and it is usually the poorest people in society that get taken advantage of like this.

It is far better to use a lay a way option with Sears or Kmart and buy yourself something after you have saved up.

You will feel great about making contributions for your appliance or electronics item and when you make the final payment you can take the item home with you and it is yours and you paid market value for the item and not a penny more.

Crispety
Post 2

Anon73694-I know that some rent to own arrangements make a lot of economic sense. For example, rent to own houses or rent to own condos offer the potential buyer the opportunity to use a rent to own lease option.

These rent to own properties often are difficult to sell and the seller offers the incentive of applying a percentage of the rent towards the initial down payments in order to entice a potential buyer.

The only drawback with the rent to own properties remains the declining value of the homes. If the market value of the home declines at the end of the lease option you could be locked in to buy at a much higher price than what the property is worth.

This is problematic if you are obtaining a bank loan because banks will not finance over the appraised value of the home.

It is best to seek a real estate attorney to know your exact options because more often than not these price declines are occurring in most markets.

anon73694
Post 1

Thank you. I always wondered what was going on in those Rent a Center type places. It makes sense that you only see those stores in the not-so-good neighborhoods.

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