Rent-to-Own: Desperation Financing

If you want furniture, small appliances, a television set or a computer, but you have bad credit or no credit, then it might seem tempting to shop at a “rent-to-own” store: You get the goods immediately, make a small payment weekly or monthly, and after a specified number of payments you acquire full ownership. You’re a renter, so if you decide you no longer want the goods or are just unable to afford the payments, you can simply return them and walk away with no damage to your credit.

If you’re poor and in desperate financial circumstances, you may feel you have few alternatives. Buying through rent-to-own, however, you will pay a huge financial penalty, and these stores seem to make every effort within the law to prevent you from understanding the extent of that penalty.

I decided to test the market by shopping for a laptop computer, given that I know far more about computers than, say, sofas. Although I didn’t lie, I also when shopping chose not to disclose that I have over 40 years experience in the computer industry.

At Aaron’s Rentals, there were literally only two models available, one new and one used. Later research discovered that their sole new laptop, a Hewlett-Packard 17-ak01nr, was introduced three years ago and appears to be no longer considered a current model by the manufacturer – not so much a problem for a sofa, but a major deal-breaker for a computer. The saleswoman blamed the paucity of inventory upon my being there on Friday after they sold out nearly everything that came in on Tuesday, which is their restocking day – although it is puzzling to understand why an obsolete model would have been recently shipped to them. Aaron’s requires on all leased computers that the customer buy their $40 anti-virus software, a policy I regard as abusive because Windows 10 already includes capable anti-virus software (Windows Defender) and many comparable high-quality products are available for free.

At Rent-a-Center, the saleswoman asked the correct first question: For what did I plan to use the computer? I said that I was not a “gamer” and wanted it for web browsing, e-mail and office applications such as word processing and spreadsheets. To her credit, she steered me to a number of appropriate selections from about 10 different new and a few different used models in stock, and didn’t try to “upsell” me as would typically happen at a more conventional store. She and her manager seemed very nice, even aggressively nice, but not high-pressure at all. Rent-a-Center, she explained, covers all necessary repairs (except for cracked screens) during the lease term, even software problems – although they have no in-house service capability and simply send the computer to a repair facility.

The problem is price. Taking as an example a new Hewlett-Packard model 15-bw030nr (a rather ordinary but capable laptop computer with a 15.6-inch screen, an AMD A9-9420 CPU, 8GB RAM, 1TB hard drive, and Windows 10), Rent-a-Center offered it to me for a “cash price” of $1,169.61 or alternatively for a 65-week lease-to-purchase at $29.99/week. If you start a lease but pay off the cash price within the first 90 days of the lease term, you immediately acquire full ownership. All of this was prominently and clearly disclosed; although the weekly payment was in giant font, the other numbers were by no means hidden.

Assuming for the sake of argument that the cash price is fair (spoiler alert – it isn’t), then the rent-to-own agreement is effectively financing that amount at 1.7152% per week – a number that is not at all made known to the customer. In fact, I had to spend some time calculating it. (Use “=RATE(65, -29.99, 1169.61)” if you’re following along at home with LibreOffice or Excel, or download my whole spreadsheet.) While this number is misleadingly small, the resulting Annualized Percentage Rate (APR), the usual way of thinking about consumer loans, is the weekly rate multiplied by the number of weeks in a year (52), an astounding 89.1911%! After 65 weeks, you will have paid a total of $1,949.35, of which $779.74 will have been interest.

Beyond the interest rate, the other important fact you cannot tell from the in-store sign is that this exact same model laptop is widely available for less than half of what Rent-a-Center represents as the “cash price,” falsely implying fair market value: Best Buy has it in stock for $534.99 ($499.99 plus 7% sales tax) and Walmart has it in stock for $524.29 ($489.99 plus 7% sales tax). Taking the Walmart price as the true estimate of fair market value, the weekly interest rate for the Rent-a-Center lease (65 weeks at $29.99/week) becomes 5.5492%, which works out to an incredible APR of 288.5577%.

Is this legal? In RI, it turns out this is a very difficult question to answer. After a number of inquiries to state agencies, including the Office of the Attorney General, I eventually spoke with Elizabeth Dwyer of the Banking Division of the Department of Business Regulation. She confirmed that the current state usury rate – that is, the maximum APR before being considered “loan sharking” – is 21%. Although her office regulates consumer lending generally, whether a particular contract is regulated as a loan under state law depends, she emphasized, upon the exact terms and content of the contract. That’s a problem. When I asked for a copy of the lease contract from Rent-a-Center, I was told that they had none to give me because these are “generated” (that is, printed out) as the last step of the process before the customer is asked to sign. (Aaron’s did not have one, either, but guessed that their lease contract might possibly be available on their website.) Because I was unable to obtain a sample of the lease, I was also unable to determine who acts as the lessor; it could be Rent-a-Center, it could be a separate company affiliated with or owned by Rent-a-Center, or it could be a separate company operating independently from Rent-a-Center. The Banking Division provided a list of all licensed consumer lenders in RI – there are about 300 – and Rent-a-Center does not appear on the list under that name, but for the reasons explained it is impossible without more information to determine the significance of this fact.

At the state usury maximum of 21% APR, or 1.75% monthly – which is about what most credit cards charge – paying off the $524.29 Walmart price would require 16 monthly (that is, over the same length of time as the Rent-a-Center lease) payments of $37.85, a total of $605.66, of which only $81.37 would be interest.

Does rent-to-own fill a consumer need if you do not have a credit card? If you made those $29.99 weekly payments to a cookie jar instead of Rent-a-Center, in a little more than four months you would have saved enough cash to buy this laptop computer from Walmart or Best Buy for about $500 instead of spending 15 months buying it from Rent-a-Center for nearly $2,000. If you missed a payment, the cookie jar would patiently hang onto your money rather than hunt you down for repossession – although, of course, you would not have the computer immediately.

The absence of clarity in state law regarding rent-to-own contracts is clearly disturbing. At a minimum, the opacity of the effective interest rate being paid by consumers worrying only about making the weekly payments is inappropriate and arguably unethical, and explicit disclosure should be mandated. While it is not illegal to sell a computer with a fair market value of $500 for a nearly $1,200 “cash price,” it may be an illegally deceptive trade practice to represent or imply that such a “cash price” reflects fair market value. State law is mired in an era of commerce from the Great Depression of the 1930s where installment sellers would retain a security interest in goods sold and then go door-to-door collecting 25 or 50 cents each week, but this is not how things work today.