Why would anyone hire? – NerdWallet
People who use option-to-buy rental stores often end up paying double the retail price – or more – for everything they buy.
So why are millions of people renting to own property?
Researchers say people who go to option-to-buy rental stores aren’t necessarily stupid. Instead, they fall prey to the kind of irrational thinking that plagues most humans, as well as the limited options faced by low-income people with bad, no, or peak credit.
“If you talk to tenant customers, you’ll find that no one thinks it’s cheap,” says Jim Hawkins, a professor at the University of Houston Law Center who has researched the industry. “Everyone knows it’s an expensive way to buy. “
The primary use of leasing with option to purchase is that it provides immediate access to household goods without having to save or make a long-term commitment – two things that are particularly difficult for low-income families who are less likely to have predictable incomes than higher-income families. rich.
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Why Payments Are Better Than Savings
Customers can get branded furniture, appliances or electronics (the market leader Rent-A-Center’s motto is “Get the good stuff today”) without credit checks or down payments and monthly payments or relatively low weekly.
Option-to-buy rental companies typically offer free delivery, installation, and service if items need repair, a huge plus, as many families don’t have the savings to pay for unforeseen expenses. (The Federal Reserve says 44% of American adults couldn’t find $ 400 in an emergency.)
If customers cannot make payments, items can be returned without triggering collection activity or damaging credit reports. Because low-income families often lack savings buffers to cope with financial shocks, they are willing to pay a high premium for the flexibility of a “totally escapeable contract,” Carnegie University researchers found. Mellon.
“An outside observer might note that they pay a huge price for these features, and they are,” says researcher Brian Zikmund-Fisher, who is now a professor at the University of Michigan. “But it is difficult for someone looking at these contracts from a place of financial stability and wealth to truly understand the experience of financial uncertainty that many people live with.”
Where the money is risky
Zikmund-Fisher and his colleague Andrew Parker found many clients who struggled to save money instead of using option-to-buy leases as a financial management tool. Low-income people often fear that the money they save will disappear into other expenses when their incomes decline, or be eaten away by bank charges, or disqualify them from certain public benefits, while the payments required by a leases with an option to buy allow them to buy goods that they could not otherwise obtain.
“They have used [rent-to-own contracts] as a self-control mechanism: it forced them to invest money in durable goods literally every week, ”says Zikmund-Fisher.
This still doesn’t make leasing with the option to buy a good idea. Buying things you really can’t afford rarely is.
The difference is that people with higher incomes and those with better credit can place their deprecated purchases on plastic at much lower effective interest rates. Someone who loads a $ 450 TV on a card with a 20% interest rate will pay $ 89.49 in 22-month interest, if they make minimum payments. To purchase the same television, a tenant customer can make 52 weekly payments of $ 20 and spend $ 1,040, which is $ 590 more than the spot price.
While customers may understand that the cost is high, many don’t quite understand how much or appreciate how leasing with the option to buy – like payday loans, auto title loans, and other products. that target low-income consumers – can erode their financial well-being. says economist Signe-Mary McKernan, an expert in wealth creation and poverty for the Urban Institute, a think tank on economic and social policies.
McKernan believes the solution isn’t in regulating the demise of these businesses, but in helping low-income families get into the habit of saving despite the barriers. She encourages people to save automatically, look for low-cost bank accounts, and learn about asset limits for benefit programs like food assistance, as they may be higher than you might think.
“The idea is to make it easier to create savings so that they need less of these products,” says McKernan.