Rent-to-Own Won't Help Your Credit Score
Written by: Kristy Welsh
Last Updated: September 25, 2017
When you have bad credit and a low credit score, making big purchases can be a challenge, if not down-right impossible. After all, if using a credit card isn't an option, all you're left with is paying cash, and coming up with hundreds, or thousands, of dollars up-front can be tough for just about anyone. Thus, the appeal of rent-to-own, a temptation to be avoided in just about any circumstance.
What is Meant By Rent-to-Own?
Rent-to-own most commonly refers to an agreement in which a consumer rents merchandise, with the option to buy, from a rent-to-own store that carries merchandise ranging from furniture, to electronics, to appliances. Payments that include high interest rates are made on a weekly, bi-weekly or monthly basis.
Do You Need Good Credit to Qualify For Rent-to-Own?
No, rent-to-own stores do not check credit reports or credit scores, which is what makes them so attractive to those with bad credit histories. Unfortunately, those with bad credit are often already deep in debt. So the last thing they need to do is pay an average of 2 to 3 times more for rent-to-own purchases than if they were to buy the same items at regular retail price. Yet that is precisely what millions of us do. According to a report that includes 2014 statistics from U.S., Mexico, and Canada, there are more than 4.8 million rent-to-own customers, taking in $8.5 billion a year business, supporting as many as 9,000 rent-to-own stores.
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Are Consumers Who Enter Into Rent-to-Own Agreements Obligated to Pay?
No, consumers may simply rent the merchandise and return it at any time. Of course, this does not include any form of reimbursement, as all payments made up to the point of return have been made in exchange for the rental period. On the other hand, the merchandise automatically transfers ownership to the consumer once a certain number of payments have been made. In fact, 70 percent of rent-to-own customers do end up making all of the required payments in order to own the merchandise. That's an awful lot of people paying 2 to 3 times more than if they'd been able to purchase at regular retail price.
Will Timely Payments Help Your Credit?
Here is the sad part, no it won't. Rent-to-own stores do not report to the credit bureaus. Avoid doing business with any store that claims otherwise, as rent-to-own salespeople have been known to stretch the truth on this point.
What if You Stop Making Rent-to-Own Payments?
If payments are late or missed, the rent-to-own store may repossess the rented items.
Can Late Payments or Merchandise Repossessions Hurt Your Credit?
No, as rent-to-own stores do not report to credit bureaus. But even this isn't much of a silver lining considering that loss of the merchandise means loss of all the money already put toward its purchase.
Pros and Cons of a Rent-to-Own Agreement
As with anything, there are always pros and cons to a given situation. We have come up with a few good reasons to go the rent-to-own route and then there are some bad reasons.
- Rent-to-own may be a practical, cost-effective option if you are living temporarily in an unfurnished residence. Under these circumstances, renting furniture, electronics and/or appliances for a couple of months will save you the expense of buying new, and the hassle of selling or moving it once it's time to go.
- If you have poor credit, maybe you just emerged from filing bankruptcy, and you have no real savings with which to make a large purchase. Getting furniture or appliances from a rent-to-own store may be your only option at this point.
- Maybe you are recently divorced and are forced to move out of your primary residence with just a suitcase of clothes. Getting an apartment may have used up all of your free cash so this is a good way to get some furniture.
- You will end up paying almost 5 times more for the item than if you purchased the same item with cash.
- Your one-time payments will not be reported to the credit bureaus. So, this purchase and your timely payments is not helping your credit score.
So, the bottom line when deciding whether or not to use a rent-to-own store for furniture or appliances, make sure to weigh the pros and cons and make your decision based on your current financial situation and needs. If you can live without that big screen TV until you save up some money, that would be a wiser decision than paying five times more for a TV that will be outdated by next year. Make smart purchases that will benefit you in the long run.