By Erienne Andvik
MoneyMix Contributor
Some might accuse me of being a skeptic, but when I first heard the phrase "rent-to-own", I promptly decided it was too good to be true. But I'm as curious as the next person, so I looked into it a little further.
For once my skepticism paid off-turns out most rent-to-own (RTO for short) options end up costing way more than you bargained for.
what's rent-to-own?
Rent-to-own, lease purchase agreements, lease-option, and lease-to-own are terms that can be used interchangeably. Rent-to-own is a type of payment method offered for a variety of items, from small electronics to houses.
Many experts see rent-to-own as a way to entice people to buy items they can't actually afford
Under an RTO agreement, you pay a weekly, monthly, or bi-monthly fee to use an item. At the end of the agreement, you can choose to purchase the item you rented. Not a bad concept, right?
But of course, as MoneyMix readers, you know there's almost always a catch. In this case, only some of your rental dollars apply to the final purchase price. The rest of the money you have been paying is simply lost as rent. And the monthly cost to "rent-to-own" is generally higher than just renting.
Let's use a condo as an example. Say you find a condo you like, and you're trying to decide between traditional renting and rent-to-own. If you choose to rent, your monthly payment would be $1,000.
Comparatively, if you choose a rent-to-own agreement, your payment would be $1,200, of which only $400 would apply to the final purchase price. So, you're ‘throwing away' $800 a month.
the name game...
Don't get confused. The terms lease-option and lease-purchase used to identify different arraignments.
Now the terms are used interchangeably. So, it's important that you review the details for these types of agreements regardless of what they're called.
Lease-option used to mean that renters didn't have to purchase the item at the end of the agreement.
Lease-purchase signified the renter was contractually obligated to buy at the end of the agreement, no matter what.
Remember, it's important to review the details to make sure you know what you are agreeing to since the terms are now synonymous. [1]
Why? Because by not purchasing the condo, the equity you've built up is not returned to you. The extra money spent to build equity is lost and instead you have simply paid a higher than normal rent payment.
Of course, there are a myriad of ways rent-to-own agreements can be set up, but the rent-to-own weekly or monthly cost is virtually always higher than the rental price.
hidden costs
RTO companies are clever-many don't post prices on their Web sites. Some require you to submit an online inquiry form, and someone from the store will call you directly. Others offer an option to call the store directly.
When pricing is described, it's usually a long-term agreement for a low monthly rate, so it doesn't seem like you're paying a lot, but it definitely adds up over time.
I found a name brand couch and loveseat set at an online RTO site. A major retailer listed the same model set for $769 before taxes and shipping. I dare you to guess how much you'd pay if you used the RTO company to rent-to-own for the full lease term...
$2,274.09 over 21 months.
This is not an exaggeration—weekly payments of $24.99 add up over a long period. When your payments end, you've got a two-year-old couch and loveseat, and have spent enough to purchase a second furniture set along with some accessories.
[1] Siddons, Sarah. "How Rent-to-own Homes Work." 16 July 2008. HowStuffWorks.com. http://money.howstuffworks.com/personal-finance/real-estate/rent-to-own-homes.htm (Accessed 05/01/2009)
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