Rent-to-Own Store

What It Means

A rent-to-own (RTO) store allows customers to rent consumer goods, such as furniture, appliances, home electronics, and computers, by paying regular rental rates. The customer has the option of taking ownership of the item after a certain number of payments have been made. In other words, each rental payment is applied toward the sale price of the goods. There are approximately 8,300 RTO stores in the United States, serving some 3 million customers per year.

The RTO industry caters to individuals and families who want to furnish their homes but are unable to pay for such purchases outright or cannot or do not want to obtain traditional credit financing. Credit financing is a loan to the consumer that allows him or her to purchase goods or services and then pay back the loan in monthly installments. The loan carries interest at an annual percentage rate (APR), meaning that a certain percentage of the outstanding balance is charged to the account annually. The interest charges add to the total cost of the item. For example, if a consumer buys a $600 sofa on credit at an APR of 10 percent and takes one year to pay off the loan, then the consumer will have paid a total of $660 for the sofa by the end of the year.

Defining itself as an alternative to the long-term financial obligation of credit financing, the RTO industry boasts that its customers can make payments toward owning goods without taking on debt (what is owed on a loan) and without paying interest. Also, customers are able to return the rented item and terminate the rental agreement at any time; there is no obligation to continue making rental payments until the consumer owns the item. RTO stores cite this no-obligation, no-debt policy as the foundation of their success. However, critics of the RTO industry insist that although RTO stores do not disclose an official APR, there is nevertheless an effective interest rate associated with their rental services. The fact is that a customer who pays off all of the installments in order to complete the purchase of an item ends up paying a significantly higher price than the retail value of the item.

When Did It Begin?

The rent-to-own industry emerged in the late 1960s. An industry that leased furniture and appliances was already established by that time (a lease is a kind of rental contract). Extending credit to customers so that they could pay off their furniture and appliance purchases over time was also common practice. However, many people who wanted to own household furnishings did not qualify for credit. When a bank or other financial institution (the lender) extends credit to an individual (the borrower), the institution is taking a risk because there is a possibility that the borrower will not repay the loan. To protect itself, the lender reserves the right to deny credit to individuals who do not meet a certain income requirement, have a history of not paying their bills, or are otherwise deemed too much of a risk. The rent-to-own concept was the brainchild of an owner of a retail appliance store whose customers were being turned down for credit. The concept spread quickly, and in little more than three decades, RTO stores had grown into a thriving $6-billion-per-year industry.

More Detailed Information

An RTO transaction involves a short-term (weekly or monthly) rental contract that can be terminated or changed at any time. At the time the rental agreement is made, the RTO store specifies an outright cash price for the item if the customer were to purchase the item on the spot. In many cases, this price is already significantly higher than the retail market price (the “going rate”) for the item. The RTO also discloses the total amount the customer will pay to own the item if he or she extends the contract over the full-payment period.

For example, at Lenny’s Rent-to-Own, a customer can buy a dishwasher outright for $700 or can pay $18 per week for 78 weeks. In the latter case, the total cost of the dishwasher will be $1,404. If the customer chooses to make a fewer number of higher payments; that is, if he or she elects to buy the dishwasher more quickly, the total amount he or she pays to own the dishwasher will be less. Although the store does not refer to the cost of paying for the dishwasher over time, the effective APR of buying the dishwasher over 78 weeks would be 100 percent, which is much higher than the APR would be to buy the dishwasher with credit financing. RTO stores justify the high cost of buying items over time by saying that the cost of the service they provide is built into the cost of the item.

At the end of each rental agreement period, the customer has several options. He or she can

• terminate the agreement and return the rented item without any further obligation;
• renew the contract by making another rental payment;
• change the terms of the rental agreement by selecting a different payment amount;
• execute the early-purchase option to assume ownership of the product (this is another way of ending, or completing, the rental agreement).

If the customer chooses to renew the agreement for the full-payment period, the customer gains ownership of the item. Each time the agreement is renewed, the RTO store is required by law to restate the amount of time it will take the customer to pay for the item completely at the payment rate he or she has chosen and the total cost of the item by the time it has been paid for in full. If the customer terminates the agreement and returns the item, then the item is typically refurbished and reoffered for rent at a lower rate. According to a 2001 study by the Federal Trade Commission (FTC), a federal agency that seeks to ensure fair competition between businesses and protect consumers from various kinds of fraud and deception, about 70 percent of RTO customers ultimately took ownership of the items they had been renting.

Recent Trends

Consumer advocates began to criticize the RTO industry and call for government regulations to reform RTO practices in the early 1980s, but the issue did not gain widespread attention until 1993. In that year, an article in the Wall Street Journal alleged abuses by Rent-A-Center, the largest RTO business in the United States at that time. Since then, consumer advocates and the RTO industry have become involved in a protracted legal and public-relations battle (the term public relations has to do with a company’s public image). Regulations that do exist for RTOs are enacted on a state-by-state basis. In 2006 Wisconsin and New Jersey carried the strictest regulations in the country for RTOs.