So, you’ve just bought a new house and the things that used to cram the space in your old apartment barely take up 1/4th of the room in your new place; so what do you do? Well, since you just spent $450k on a house, including closing and moving costs, you are strapped for cash and not really willing to take on more credit balancing endeavors.
What do you do when you need furniture and electronics to make your new house feel less echo-y? Your credit card is maxed, but you have a full time regularly paying job–you can rent-to-own!
The Rent-to-Own Industry
RTO, or rent-to-own, is a basic contract that starts out as a normal rental agreement, but the agreement states that some point in the future (typically after you’ve paid off the balance owed), ownership of the rented item transfers to the renter. This allows consumers with no credit or bad credit to ‘purchase’ items like furniture and TVs without using their credit history. All you need to enter into a RTO agreement is a social security number, proof of residence, and proof of a regular monthly income.
Seems easy right? Well, there is a reason for that.
The RTO industry isn’t out to help people in need of a great living room set; they are out to make money. Quick, easy money.
The Ugly Side of RTO
Imagine this scenario: you’re shopping for the perfect car online, you’ve done your research and you know that the one you want can be purchased outright for $10,000. That is a little more than you have on hand, and you don’t qualify for a car loan, so you seek out a rent-to-own low credit/no credit car dealership that has the car you want.
You look over the car, decide to buy it, and retreat into the seller’s office with pen in hand ready to sign your name on the dotted line.
Once all the paperwork is in order, you take a look at the total cost of the car once everything is said and done…that car that you wanted, which was only worth $10,000, will cost you $19,500 by the time you’re done making payments and ownership transfers to you. How is it possible that you are now stuck paying
WAY more than the car is worth?
It’s all about the interest charged.
RTO companies make their money on the interest. Many consumers will find that the interest they are paying on a $1000 couch is 22% or more.
Sure, you’re only paying $33 every week for a grand total of $132 per month, but the RTO company is smart enough to stretch the payments out over the course of 18 or more months so that the consumer doesn’t really notice that they are paying far more than they should for a used couch. Used? Yes. More often than not, consumers cannot make the payments and the items are repossessed, superficially cleaned, and put back on the sales floor. Most of the time consumers are spending new couch money on a couch that has been in more than one home.
When Does Rent-to-Own Work?
No, not all RTO situations are bad. The popularity of RTO homes is rising, and despite the bad rap that RTO companies get from their shady deals on dining room furniture, there are actual real estate companies that are offering RTO options to their clients. If the seller can’t sell, which is the case a lot these days, but needs to move for work and cannot afford rent on the new place and the mortgage on the house, they may sign an RTO contract to rent out the house for the price of the monthly mortgage payment. The mortgage gets paid by a renter, the house is occupied, the house will be sold (eventually), and someone who wouldn’t necessarily have the opportunity to own a home is on a long, but hopeful road to homeownership.
RTO – Trap or Triumph?
If you have the patience and are desperate for home furnishings and electronics, by all means, sign your next two years away to an RTO company. You’ll find that making small payments is nice, but paying hundreds of dollars over the value of the item can become frustrating.
RTO homes can be real life savers for people who want to own but have made bad credit decisions. Still, you should always enter into an RTO contract knowing all of the facts including the interest rate, the value of the item or home, how much you’ll pay per month, how much is charged in late fees for late payments, how much you’ll have paid when the contract is up, and the expected pay-off date.
Depending on what kind of RTO contract you’re signing, you can either be heading towards a trap or triumph. Have you been bitten by the RTO industry? Do you have a story to tell? Share it with us, we’d love to hear what you have to say.