Almost every consumer advocate out there talks about what an awful deal rent-to-own contacts offer buyers. Folks from Consumer Affairs, to Dave Ramsey, and others tell stories of unscrupulous sales people, 300%+ interest rates, total purchase costs at 2-3 times the actual price of the products, and harassment of customers after slightly late payments.
Rent-to-own contracts are tough to deal with in bankruptcy too, because they are almost always classified as executory contracts. This means they aren’t debt that can be discharged. Maybe late fees incurred as a result of missed payments can be included, but by and large, the contract has to be reaffirmed to keep the products.
But I keep seeing clients who list these types of obligations on their intake forms. Since I generally believe that people are pretty good at making their own best decisions given the information and assets they have, I started to wonder whether these deals are as bad as I’ve always assumed.
To add context to my thoughts on rent-to-own, I recently read an article about Lisa Servon, Professor of City Planning at the University of Pennsylvania. Lisa was a huge critic of payday lenders and check cashing businesses. She wanted to do a book exposing how bad these types of businesses were for their customers. So she actually took several jobs working at check cashing stores to get the inside scoop. Her perspective completely changed after meeting actual customers and learning about what led them to make the choice to use non-bank financial services. Her book, The Unbanking of America details her new insights.
Folks decided to go unbanked for 3 primary reasons. First, check cashing can be cheaper for low-income folks. If you’re living paycheck to paycheck, the delays involved in the traditional banking system end up costing lots of money. If your rent check is due Friday and you get paid on Friday, you might be able to deposit your paycheck and write a rent check the same day, but odds are decent that you’ll end up with the funds crossing (banks tend to take money out faster than they put it in) and incurring a $20-40 fee. That can end up being a lot more than the 1.95% + $1.50 to cash the paycheck then send a payment to the landlord.
Second, all of the prices for the check-cashing store are listed on a board right up front. Banks disclose their fees, but they are in little brochures, and they use words that don’t necessarily make it clear when a particular fee is going to apply. If you need to know where every penny is, knowing your fees up front makes a difference.
And lastly, the people who use check-cashing services report that the customer service at these stores is better than at the traditional banks. As banks have consolidated and gotten bigger and bigger, personal service has gotten less and less common.
So after reading about Ms. Servon’s experiences, I now wonder if there might be another story to the rent-to-own business as well. As Prof. Servon says, low-income people do make smart economic decisions when they can. So is the same true of using rent-to-own? I’ll show some reasons this might also be true in Part 2 of this post.