Rent to Own: The Complete Guide

You’ve probably seen those “rent to own” ads for furniture, TVs and appliances at stores like Rent-A-Center or Aaron’s Rent to Own.

But you might be surprised to learn it’s also possible to get things like computers, jewelry, musical instruments, gaming systems, tires and wheels, or even a house using the rent to own business model.

That model is pretty simple: Make payments for a certain amount of time and the item is yours. If you change your mind, you simply return the product.

Renting to own could be one answer for emergencies, such as an apartment fire that destroys your belongings. But most people rent to own because they can’t afford to buy outright.

According to industry group the Association of Progressive Rental Organizations, 41% of customers earn less than $24,000 a year. Another 31% earn less than $36,000 per year.

Those ads that show nice-looking furniture, the newest electronics and gleaming appliances look pretty enticing to people who don’t earn much money – especially since the ads feature phrases like “no down payment,” “no credit check” and “same-day delivery.”

That convenience comes at a cost, however.

Most rent to own purchases will cost double or triple what you’d pay with cash or buying on installment, according to the Federal Trade Commission.

Is renting to own ever a good idea? That depends. This is a complex topic, so we’ve broken it down for you.

In this article

• Rent to own homes
• Rent to own household goods
• What else can I rent to own?
• Is rent to own right for me?

Rent to own homes

With a mortgage, you take out a loan and make payments for 15 years or more; until the loan is paid off, the bank owns the home.

Rent to own, on the other hand, is a contract between you and the owner: You negotiate the home price and pledge to buy the house within a certain period of time. Until then, you’ll pay rent.

Is a rent to own home a good idea? Possibly. In fact, it can benefit both parties:

• A potential buyer gets time to save up a down payment and/or improve their credit in order to get the best possible mortgage rate. In the meantime, they have a place to live and no worries about a landlord raising the rent or not renewing the lease.
• A property owner who wants to sell within a certain time frame – say, when they retire in three years – will have a guaranteed buyer at that time, and a guaranteed renter until then. And in the case of a downturn, a property owner can secure the best possible price before the real estate market drops any further.

The lease term will vary, but it will always include a lease option fee. Typically that’s 2.5% to 7% of the purchase price. This money is usually put toward the purchase price of the home. If ultimately you decide not to buy, the owner gets to keep the lease option fee.

“That compensates the seller for locking up the property for three years,” says Casey Fleming, a mortgage broker with C2 Financial Corporation in San Diego.

Note: A lease option is different from a “lease purchase” agreement.

With a lease option, you’re given the right to buy, but you are not required to buy. (The property owner, on the other hand, is obliged to sell if you exercise your option to purchase.)

With a lease purchase, both parties are bound by contract: one to sell and the other to buy.

L.E. Moore and her husband bought their Louisville, Ky., home from his parents, after renting for three years. “He loved the house so much” that it made sense for them to buy, says Moore, a middle-school teacher.

Since theirs was a family deal, they didn’t worry about contracts and deposits.

However, Moore advises others to “get everything in writing,” have the house inspected and think long and hard about the commitment:

“Is this a place I can see myself in 10 years?”

Finding and buying your RTO home

If you’re not buying from family, finding a rent to own home can be a challenge.

Some real estate brokers offer rent to own as part of their services; ask around. A motivated real estate agent might help you identify homes that might be a good fit; for example, a house that has been on the market for a while, or a landlord who wants to sell in the near future but isn’t quite ready to pull the trigger.

Since you won’t own the home until the end of the contract, you probably won’t have to pay any property taxes; it depends on the contract you negotiate with the seller.

However, as a rent to own tenant you’ll likely be expected to take care of maintenance, instead of asking the landlord to make repairs. You’d need to budget for those potential costs along with your monthly rent payments.

It’s vital that you fully understand the contract, and that you watch out for potential scams. For example, some crooks will offer up a property that isn’t even theirs to sell. Others will promote a rent to own deal even though their properties have liens against them, or have unpaid taxes that could lead to foreclosure.[8]

Fleming suggests hiring a real estate attorney – not a real estate broker or realtor – to look over the agreement.

“Very few brokers ever handle this kind of a deal. It’s not a contract most people ever see,” he says. “An attorney can help you check things out.”

Rent to own household goods

In some cases, a short-term rental makes more sense than buying that bed or television.

According to APRO (the "voice of the rent to own industry"), rent to own stores often furnish homes for seasonal travelers (aka “snowbirds”), business executives on short-term assignments, and sports teams during spring training.

Rent to own stores also do a booming business during major sporting events such as the Super Bowl, when fans rent big-screen televisions and, sometimes, extra furniture for big parties.

It might also be an emergency situation, such as being served with divorce papers (or needing to file them yourself). While your emergency fund might cover the deposit, moving costs and first month’s rent, would there be anything left even just for a bed, a chair and a microwave?

Or maybe after months of unemployment you’re offered a chance to do customer service work from home. But you’d need a decent-quality computer and you can’t afford to buy one.

If you don’t have a credit card or a high enough credit score to finance through the retailer, the question would be: Should I say “no” to a job or should I do what it takes to make a living again?

Rent to own stores have seen steady growth in computers over the past decade, representing 10.7% of sales, according to Apro. The “tires and wheels” category has also grown rapidly, with average sales on $721,000 per year per store. But the industry’s biggest categories are furniture (36.7%), electronics (24.9%) and appliances (18.6%).

At first glance, renting to own looks like buying on an installment plan: You sign a contract to make regular payments, usually for 12, 18 or 24 months, according to the FTC.

If at some point you can’t afford the payments or decide you don’t want the item, you return it to the store. About 75% of customers return the items within the first four months, according to APRO, and only 8% rent for the full contract term.

Some rent to own companies will fix or replace an item if it breaks; however, some charge a fee for doing this.

Depending on the contract, you may also pay fees for:

• Processing
• Delivery and pick-up
• Installation/setup
• “Excessive” damage
• Late payments and In-home collection (if store employees collect the payments from you)

If you can’t make the payments and return the item, it’s often possible to “reinstate” your contract with the store and begin again; you’ll likely be charged a fee to do this. But if you can’t afford to start again, you lose all the money put towards rentals.

What it costs

As noted, the total price paid can be double or triple the retail cost. A few examples from the FTC’s website:

• 32-inch television with retail cost of $250: 78 weekly payments of $8.50 each plus one more payment of $37, for a total of $700
• Laptop computer with retail cost of $612: 48 weekly payments at $38.99, for a total of $1,872
• Dining table and four chairs with retail cost of $523.75: 12 monthly payments of $83.13, for a total of $997.56

There’s often an “early payment” or “same as cash” option that lets you pay the item off sooner. But according to the FTC, that cash price is still “much higher” than retail.

Some consumer advocates have called rent to own “predatory lending” that preys on those with bad credit. The industry points out that no actual credit or loan is offered – just a leasing agreement.

The U.S. government appears to agree: A Department of Defense ruling about consumer credit and servicemembers specifically excluded rent to own, calling it “an expensive alternative to credit” but not a loan under the federal Truth in Lending Act.

Other rent to own formats

Many major retailers have their own versions of renting to own. With some it’s traditional installment financing and with others it’s called “lease to own.” Unlike a layaway plan, you get the product upfront and pay as you go.

Generally these retailers use what are known as "buy now pay later" companies to handle the payments. Some of those companies include Affirm, Afterpay or Klarna.

One big difference between these retailers and rent to own stores is, again, the cost.

When you finance a washing machine from Lowe’s or a bed from Walmart, you’re paying the regular retail price. As noted earlier, the cost at rent to own stores is much higher than the manufacturer’s suggested retail price, even if you pay it off early.

Another major difference: your credit history.

A typical rent to own company makes its decision based on proof of income and personal references. It won’t pull your credit report, so even if you have bad credit you can probably be approved.

By contrast, a retailer might have the words “no credit needed” in its ad but the third-party company will almost certainly check your credit report, according to Progressive Leasing. The company uses this information along with your income and banking history to determine whether to work with you.

A low score or lack of credit history does not necessarily keep you from getting approved. However, it might affect the annual percentage rate that you pay.

What else can I rent to own?

Rent to own stores offer a wide variety of products, including but not limited to:

• Mattresses
• Office furniture
• Televisions
• Computers
• Jewelry
• Tools
• Tires and wheels
• Video or arcade game setups
• Air conditioners
• Musical instruments

Keep in mind that major retailers may also sell these items on installment or lease-to-own terms to those who qualify.

Not every item at a big retailer is eligible for installment financing or lease-to-own, however; for example, Walmart excludes weapons, pet supplies and pharmacy, among others.

Rent to own cars

It’s also possible to rent to own your next automobile.

If you have poor credit and can’t qualify for even a subprime auto loan, some independent auto dealers offer a rent to own option. You make a down payment and then a weekly payment, and at the end of the contract you own the car.

All you’ll need is a form of ID, proof of employment and residence, and a down payment. The dealer probably won’t run a credit check or charge you any interest. That’s because these vehicles tend to be bought cheaply at auction and then marked up 100% or more.

In some cases, your down payment alone could be one-third or more of the dealer’s purchase price.

Note: It’s essential to make your payments on time. If you miss even one week, the dealer might be within their rights to cancel the contract – which could mean losing everything you’ve paid until then.

A major drawback of rent to own vehicles is that they have no warranty. Once you sign on the dotted line, the vehicle is yours to drive – and to fix, if it breaks down.

And if you wind up with a lemon that costs more to fix than to keep paying for? Breaking the contract means you’ll likely lose your down payment and everything you’ve put toward the car up to that point.

On the other hand, you’d be free of the obligation to keep paying. With a subprime auto loan, you’d be on the hook for payments even if the car were no longer drivable.

Is rent to own right for me?

It’s always going to be cheaper to buy with cash, or to use a credit card that you pay off in full, than to finance a purchase. However, a rent to own scenario might be the most viable option in some cases.

For example:

Someone with a job offer in hand who needs that computer now could quickly shop around for the best possible deal and get to work.

After that, they could save as much as possible from each paycheck, look for a great deal on computers and pay cash, and then return the rent to own model.

The same is true for homebuying:

Most people can’t pay cash for a house, and not everyone can qualify for a good mortgage rate. Or any mortgage at all.

A client of Fleming’s wants to buy the property where he and his brother live, but he had a fairly recent bankruptcy that would prevent him from getting an affordable loan. A three-year rent to own contract would lock in the property at today’s prices, and the client should be able to get a conventional mortgage by the end of the contract.

“It would be an excellent solution for the two of them,” Fleming says.

Again, a rent to own property could be a scam in the making; if you can’t afford a real estate attorney, at least look up the most recent tax bill to make sure property taxes are current and check state records to see if there are any liens against the home.

(And remember that spending a little money on an attorney now could prevent you from losing a lot of money in the future.)

The same due diligence is needed when renting to own household goods and personal items.

Read the contract carefully and ask the store clerk to explain anything that doesn’t seem clear. Rather than signing right away, take the contract home and think about the decision; if you have a spouse or partner, ask them to look over the contract with you and discuss the pros and cons.

If the store clerk pressures you to sign right away, walk out. This isn’t a decision to be made lightly. The same is true when you visit a rent to own auto dealer: Don’t let anyone push you into signing something you don’t quite understand or haven’t thought through carefully.

Rent to own alternatives

Unless your need is truly urgent, don’t enter a rent to own contract just yet. Instead, think about other ways to get your needs met, such as:

Re-evaluating needs vs. wants. Do you need that new bed or dining room table, or do you just want it? Think about the opportunity cost of paying double or triple the retail cost.

Those are dollars that can’t work for you any other way, such as building an emergency fund or contributing to retirement.

Ask around. Maybe a relative or a friend has an air mattress or a card table you can use while you save up enough to pay cash for replacements.

Ideal? No. More cost-effective? Absolutely!

Go online. Sites like OfferUp.com and LetGo.com are a way to buy what other people no longer use; the prices are generally low.

The Buy Nothing Project sponsors Facebook groups for the completely free exchange of furniture, household goods, appliances and other items. Freecyle.org and Craigslist might also have what you want.

Head to the ReStore. These stores, run for Habitat for Humanity, feature a wide array of consumer goods and building supplies. Furniture, appliances and other items are donated and then sold at rock-bottom prices. The selection varies depending on the site, but you may find exactly what you need.

To find a ReStore in your area, visit this link.

Hit yard sales/thrift shops. Buying upholstered furniture this way is dicey, as it might bring fleas or bedbugs into your home. However, wooden furniture and other non-fabric items should be safe.

Most important of all:

Take steps to build (or to rebuild) your credit and create a workable household budget.

With a good credit score, you should be able to qualify for low-interest financing or a credit card.

With an established budget, you’ll be able to make payments on time and in full.

The combination can help you get control of your cash and put you on track toward a more secure financial future.

Need to build your credit? Self provides a step-by-step credit building process that could help you do just that. Learn ways to build your credit here.

About the author

Longtime personal finance writer Donna Freedman lives and writes in Anchorage, Alaska.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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