Rent-to-own making a comeback, but it will cost you

It’s come crawling from the swamp like a B-movie monster – and just in time to prey on vulnerable holiday shoppers.

K-mart is introducing a new rent-to-own program in the U.S. following a similar launch by Sears Holdings, which owns K-mart.

Rent to own operators have been laying low in Canada and the states lately after pressure from government and consumer groups. In many cases rent-to-own programs can more than double the price of an item each year. Critics claim it’s a sneaky way of getting around laws that limit interest charges on consumer items. Rent-to-own is normally relegated to the retail margins, so having major chains like K-Mart and Sears targeting vulnerable, low-income consumers is a frightening departure. It’s a curious coincidence that both chains are themselves on the financial skids.

How rent-to-own works

Rent-to-own agreements are typically on weekly, bi-weekly or monthly terms. At the end of the term the purchaser can decide whether to renew the agreement and make a regular payment, or terminate it and return the item. According to U.S.-based Association of Progressive Rental Organizations about 75 per cent of rent-to-own customers return the items within four months. Another study by the University of Massachusetts Dartmouth found 90 per cent of rent-to-own merchandise is returned within about one-third of the scheduled payments made.

Those few purchasers who decide to make regular payments can eventually own the item. Agreements often include an alternative option where the purchaser can own the item at any time by paying off the balance. A representative from the U.S. based National Consumer Law Center calculates customers making the minimum number of payments could wind up paying the equivalent of 117 per cent interest annually.

Most customers resort to rent-to-own because they don’t qualify for credit or can’t afford the items outright. Critics claim rent to own retailers often take advantage of those customers by inflating the original purchase price of items – further adding to the markup.

Rent to own alternatives

Sears Holdings vice president of financial services Jai Holtz recently told Bloomberg the rent-to-own program is in response to consumer demand – giving customers with no cash instant access to big-ticket items like televisions.

It’s not hard to see the appeal from the customer’s point of view, especially with the holidays approaching. The odds may be stacked against them actually ever owning the item but in the end they will never incur debt even if payments are missed.

The Better Business Bureau website provides tips for customers wanting to go the rent to own route:

• Look for retailers who offer flexible payment plans that allow customers to increase payments. Higher payments can make the total payment period shorter and reduce the overall price. A flexible payment plan could also allow customers to reduce payments if money is tight, and still keep the item.

• Read all terms and conditions carefully, and beware of hidden fees if items are returned damaged.

• Calculate the total amount charged each payment period for the duration of the contract, and compare it with the list price of the same item in conventional stores. Knowing how much more it costs in the end could persuade consumers to back out before signing on the dotted line.

• Consider layaway until you can save the money. You may not have the item right away but paying a portion up front to get the store to hold it for you can be financially rewarding, and give you something to look forward to.

• Wait and build a credit rating with a trusted financial institution. Being able to borrow at a reasonable rate is a gift to yourself that keeps on giving.