How Does Rent to Own Work?
Rent to own may sound like an exciting option for people who don’t have a ton of capital in the bank but still want to live a certain lifestyle.
Rent to own refers to one of any number of purchasing plans whereby you pay a monthly rate on an item for a certain period of time. At the end of that period of time you have the option of purchasing the item outright.
This option is popular with everything from computers and furniture to cars and even homes. Here’s a quick look at how rent to own works, and a couple of arguments for and against using rent to own.
Rent to Own Furniture
Let’s say it’s a week to the Super Bowl and you want to impress your friends and family with your new 500 inch rear-projection plasma-injected hologram-enabled television. If you’re like most Americans, you don’t have thousands and thousands of dollars on hand to shell out for a new TV set. There’s good news! You can march down to your local rent to own furniture store and take that massive television home for way less than what you’d pay at the big box electronics store. How?
You sign a contract which requires you to pay xx amount of dollars every month (or week) for a set amount of time before you’re given the option of purchasing the item.
Depending on the contract you sign, this kind of rent to own purchasing could be really dangerous for your finances. You don’t want to sign up for a contract that locks you into an amount you simply can’t afford — and you don’t want to end up paying more for the device than it costs to buy outright. This is basic math, people — if the television you want costs $1200, don’t sign a twelve-month contract that charges you $150 a month.
If you’re in a bind and really need a piece of furniture fast or for a limited amount of time, rent to own furniture makes sense. Just make sure you read your contract thoroughly and shop around.
Rent to Own Cars
Most basic car leases are a “rent to own” contract. Rent to own cars work something like this — you pay a down payment (which can be high or low depending on the model of car and the dealership) then sign a contract to make a payment for a specific amount of time. Most “rent to own” car leases have strange contract arrangements whereby you pay every week or, at best, once every two weeks. Make sure that you can swing a weekly payment (even if it seems low, remember that you’ll be paying this amount every week) before signing up. Most of these leases run for between 18 and 30 months.
Once you’re finished with your weekly or biweekly contract, the car dealer signs the lease over to you and you own the car. The advantage of this over purchasing a car outright is that you don’t have to secure financing for a rent to own car lease. Other advantages? The rent to own car dealer pays licensing and sales tax costs for you, and you don’t have to pay property tax on the car until your contract is finished — after all, the car isn’t technically your property.
Be careful when signing a rent to own car lease — if you can’t make your payments, you will lose not only the car but your payment history.
Rent to Own Houses
If you need to buy a home but don’t have the credit score to secure financing, there is a rent to own option available. You will end up paying more for the home, but if the rent to own system gets you in a house of your own, who cares if you spend a little more money?
A home’s seller determines their sale price as well as the monthly rental price they’d charge for the rent to own home. The “rent to own” term on a home is usually one to three years so be careful that you establish a fair value. No matter how much home values fall or rise during that one to three year period, the price will remain the same.
The person who wants to “rent to own” puts down an option fee that the home owner holds onto during the rental period. If the person renting decides to buy at the end of the period, that option fee becomes part of the downpayment. If the renter doesn’t buy the house, that option fee becomes pure income for the home’s owner.
Rent to own can be a valid option for people with poor credit. Make sure and read the contracts thoroughly before you decide to rent to own, regardless of whether you’re buying a television or a new home.
This is part of a series of blog posts we’re publishing about How Stuff Works. The other posts in this series include:
- How Does E-Mail Work?
- How Does Soap Work?
- How Does Twitter Work?
- How Does Gravity Work?
- How Does Unemployment Work?
- How Does Wi-Fi Work?
- How Does the Eye Work?
- How Does a GPS Work?
- How Does Electricity Work?