Peo­ple who rent to own pay dou­ble re­tail price

Austin American-Statesman Sunday - - BUSINESS SUNDAY - Liz We­ston

Peo­ple who use rent-to-own stores of­ten end up pay­ing twice the re­tail price — or more — for any­thing they buy.

So why do mil­lions of peo­ple rent to own?

Re­searchers say peo­ple who pa­tron­ize rent-to-own out­lets aren’t be­ing stupid, nec­es­sar­ily. In­stead, they’re fall­ing prey to the kinds of ir­ra­tional think­ing that plague most hu­mans along with the limited op­tions fac­ing low-in­come peo­ple with bad, nonex­is­tent or maxed out credit.

“If you talk to rent-to-own cus­tomers, you’ll find out that no­body thinks this is cheap,” says Jim Hawkins, a pro­fes­sor at the Univer­sity of Houston Law Cen­ter who has re­searched the in­dus­try. “Ev­ery­body knows this is a costly way to buy.”

The pri­mary ap­peal of rentto-own is that it pro­vides im­me­di­ate ac­cess to house­hold goods with­out hav­ing to save or make a long-term com­mit­ment — two things that are es­pe­cially dif­fi­cult for low-earn­ing fam­i­lies who are less likely to have pre­dictable in­comes than wealth­ier fam­i­lies.

Pay­ments vs. sav­ing

Cus­tomers can get brand­name fur­ni­ture, ap­pli­ances or elec­tron­ics (mar­ket leader Rent-A-Cen­ter’s motto is “Get the Good Stuff To­day”) with no credit checks or down pay­ments and rel­a­tively low monthly or weekly pay­ments.

Rent-to-own com­pa­nies typ­i­cally of­fer free de­liv­ery, setup and ser­vice if items need re­pairs, a huge plus, be­cause many fam­i­lies don’t have sav­ings to pay for un­ex­pected ex­penses. (The Fed­eral Reserve says 44 per­cent of U.S. adults couldn’t come up with $400 in an emer­gency.)

If cus­tomers can’t make the pay­ments, the items can be re­turned with­out trig­ger­ing col­lec­tions ac­tiv­ity or dam­age to credit re­ports. Be­cause low-in­come fam­i­lies of­ten lack sav­ings cush­ions to deal with fi­nan­cial shocks, they’re will­ing to pay a hefty pre­mium for the flex­i­bil­ity of “a com­pletely es­capable con­tract,” re­searchers at Carnegie Mel­lon Univer­sity found.

“An ex­ter­nal ob­server might note that they are pay­ing a huge price for those fea­tures, and they are,” says re­searcher Brian Zik­mund-Fisher, who is now a pro­fes­sor at the Univer­sity of Michi­gan. “But it’s 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 cash is risky

Zik­mund-Fisher and his col­league An­drew Parker found many cus­tomers who strug­gled to save money in­stead em­ployed rent-to-own con­tracts as a fi­nan­cial man­age­ment tool. Low-in­come peo­ple of­ten fear any money they save will dis­ap­pear into other spend­ing when their in­comes drop, or get eaten up by bank fees, or dis­qual­ify them from some pub­lic ben­e­fits, while pay­ments re­quired by a rentto-own con­tract al­low them to pur­chase goods they couldn’t other­wise get.

“They used (rent-to-own con­tracts) as a self-con­trol mech­a­nism: It forced them

to put money towards durable goods on lit­er­ally a weekly ba­sis,” Zik­mund-Fisher says.

That still doesn’t make rent­ing-to-own a good idea. Buy­ing stuff you re­ally can’t af­ford rarely is.

The dif­fer­ence is that higher-in­come peo­ple and those with bet­ter credit can put their in­ad­vis­able pur­chases on plas­tic at much lower ef­fec­tive in­ter­est rates. Some­one who charges a $450 tele­vi­sion on a card with a 20 per­cent in­ter­est rate will pay $89.49 in­ter­est over 22 months, if she makes min­i­mum pay­ments. To buy the same TV, a rent-to-own cus­tomer might make 52 weekly pay­ments of $20 and spend $1,040 — $590 more than the cash price.

Although cus­tomers might un­der­stand the cost is high, many don’t un­der­stand ex­actly how high or ap­pre­ci­ate how rent-to-own — 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 on wealth-build­ing and poverty for the Ur­ban In­sti­tute, an eco­nomic and so­cial pol­icy think tank.

McKer­nan thinks the so­lu­tion lies not in reg­u­lat­ing these busi­nesses out of ex­is­tence, but help­ing low-in­come fam­i­lies get in the habit of sav­ing de­spite the ob­sta­cles. She en­cour­ages peo­ple to make sav­ings au­to­matic, look for lowfee bank ac­counts and learn about as­set lim­its for ben­e­fit pro­grams like food as­sis­tance, since those might be higher than peo­ple think.

“The idea is to make it eas­ier to cre­ate sav­ings,” McKer­nan says, “so they need these prod­ucts less.”

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