The Perils of Rent-to-Own

It's expensive being poor. The poor often end up paying much more for consumer goods and groceries than do middle-class and well-to-do families. This may seem illogical; shouldn't the poor spend less money by purchasing less expensive goods? Not if they don't have enough money to purchase goods all at once, and not if they don't have the requisite transportation to get to the mainstream department stores found at suburban malls.

Those without enough money to buy furnishings and appliances for their home use "rent-to-own" stores, like Rent-A-Center (RAC). These stores allow customers to essentially take out a lease on everything from televisions to washing machines with a low down payment, and then pay monthly or weekly payments for one to two years until they have payed the entire cost of the good, at which point they become the full owner. It may sound like a good idea, until you realize that these stores pray on the poor by initially charging up to two times the normal retail price of the products, and by also charging exorbitant interest rates that are almost comparable to pay-day lending and loan sharks. Furthermore, if a customer misses a payment, the store can reclaim the item and keep all payments made prior to the return.

Policy Matters Ohio (where I am interning this summer, and Wiki), just released a report on rent-to-own stores in Ohio. In Paying More, Renting Debt, Policy Matters found that not only did rent-to-own stores locate mainly in impoverished communities, but that the average rental purchase price was 4.5 times higher than the normal retail price for a stove, 2.7 times higher for a washer-dryer pair, and 2.9 times higher for a stove.

Few states in the US have strict regulations on rent to own stores: Wisconsin sued RAC in 1999 for not revealing the interest rates being charged to consumers, and New Jersey has ruled that these stores are subject to its caps on APR. Policy Matters recommends that Ohio enact price caps of 200% of normal cash purchase price, and treat rent-to-own transactions under credit laws and subject them to usury ceilings.

It certainly makes sense to me. It's easy for the poor to get sucked in to this never-ending cycle of debt, but very difficult to climb out of it. And it is especially important now, as more people find themselves in economic difficulties, that we attempt to protect consumers from incurring outrageous levels of debt.