Rent to own
Encyclopedia
Rent-to-own, also known as rental-purchase, is a type of legally documented transaction under which tangible property
, such as furniture
, consumer electronics
and home appliance
s, is leased in exchange for a weekly or monthly payment, with the option to purchase at some point during the agreement. Differing from traditional methods of purchase, rent-to-own transactions are not obligations to purchase, since the agreement can be terminated by the lessee at any point in time with the return of the property. The usage of rent-to-own transactions began in the United Kingdom
and Europe
, and first appeared in the United States
during the 1950s and 1960s. While rent-to-own terminology is most commonly associated with consumer goods transactions, the term is sometimes used in connection with real estate transactions.
and continental European countries
under the hire purchase
model. One of the first rent-to-own retail stores established in the U.K. was Lotus Radio, which began operating as a radio rental business in 1933. Within the United States
, the practice of retail-based rent-to-own businesses began to develop in the 1950s
and 1960s
. Individuals cited as key figures in the history of the rent-to-own transaction and application as a business model include Charles Loudermilk, Sr., who in 1955 began renting out Army surplus chairs and later founded Aaron Rents, and J. Ernest Talley, who started Mr. T’s Rental in Wichita, Kansas in 1963, and later helped establish Rent-A-Center
.
on a weekly or monthly basis by making renewal payments, or to terminate the agreement with no further obligation by returning the tangible property. Though not obligated to do so, the consumer can choose to continue making interval payments on the merchandise for a pre-specified period of time, at which point they would own the good outright. An alternative purchase option is commonly provisioned for, allowing the consumer to pay off the remaining balance on the agreement at any point in time in order to obtain permanent ownership.
According to a Federal Trade Commission
survey on the rent-to-own industry in the United States conducted in the year 2000, consumers reported that they elected to engage in rent-to-own transactions for a variety of reasons, including “the lack of a credit check”, “the ability to obtain merchandise they otherwise could not”, and “the convenience and flexibility of the transaction”. The most common reason cited for dissatisfaction within the survey was high prices. In addition, some survey respondents reported poor treatment by employees in connection with late rental payments, problems with repair services, and hidden or added costs.
The cost incurred by consumers in rent-to-own transactions has been the subject of long-term debate and differing opinion. Historically, consumer advocates, some U.S. state attorneys general and some academic researchers have expressed concern that consumers entering into rent-to-own agreements may be unaware of the potentially high long-term costs of rent-to-own in comparison to traditional installment
or layaway
plans. Often mentioned alongside most critiques is the question of whether prices paid for services of this type are adequate for lower-income individuals who can least afford additional financial outlays. At the same time, other academic researchers and representatives of industry associations have contended that rent-to-own transactions are not comparable to traditional methods of purchasing or financing
consumer goods, in that they include services such as delivery, assembly, service and repair, all of which are factored in to the higher assessed value and corresponding price charged. Also frequently noted by proponents of the unique nature of rent-to-own transactions is the point that they are not obligations
to purchase, since the agreement can be terminated by the lessee at any point in time with the return of the property. Research conducted by the University of Massachusetts Dartmouth
in 2003 found that 90% of rent-to-own merchandise is returned with less than 36% of the scheduled weekly payments made, suggesting that transactions of this type are "more frequently used for short-term needs rather than as a method of acquisition."
or a credit sale. The industry has contended that the transaction is a lease; while consumer advocacy groups have advocated for the transaction to be treated as a credit sale. As of 2011, forty-seven U.S. states, Guam
, Puerto Rico
, and the District of Columbia have passed laws characterizing the transaction as a lease. Of the five U.S. state supreme courts that have addressed the question, three (Massachusetts
, Arkansas
and Maine
) concluded that the transaction was a lease. New Jersey
and Minnesota
concluded it was a credit sale based upon those states’ credit laws. A federal district court
in Wisconsin
also found the transaction to be a credit sale under Wisconsin state law.
As of 2011, no U.S. federal
consumer protection law specifically addresses rent-to-own transactions, but through litigation, efforts have been made in attempt to bring rent-to-own agreements under the definition of “credit sale” in the Truth in Lending Act
. However, courts have not, as of 2011, ruled in favor of making this change at a federal level. In 2006, the United States Department of Defense
labeled rent-to-own a predatory lending practice, defining it as an “unfair or abusive loan or credit sale transaction or collection practice,” along with payday loan
s, title loans, refund anticipation loans and other similar practices. In 2007, the United States Government Accountability Office raised concerns with the methodology and structure of this research. Later in the same year, the Department of Defense ultimately concluded that rent-to-own was not a form of credit and excluded it from its regulation on predatory lending practices.
merchandise when a consumer is close to acquiring ownership
. At the time of a 2000 FTC survey, individuals who engaged in rent-to-own transactions reported a “low incidence of late-term repossessions,” which the FTC suggested might be due to the reinstatement rights mandated in most states, as these rights allow consumers to reinstate this type of contract after repossession.
agreement. In a rent-to-own real estate agreement, the tenant
has the option to purchase the real property
at a fixed price within a specific period of time, usually one to three years. As part of the contract, the renter may be required to make a nonrefundable deposit. Occasionally, a portion of the monthly rent paid during the lease period is counted towards the down payment
on the property, often in addition to the monthly rent as a monthly premium that sets the rent above the current market rate. If the tenant is unable to exercise the option to buy, the owner is then free to rent or sell the property to another buyer, or to restructure the contract. Rent-to-own real estate contracts typically become more frequently exercised during housing market downturns, such as the late 2000s financial crisis.
Tangible property
Tangible property in law is, literally, anything which can be touched, and includes both real property and personal property , and stands in distinction to intangible property....
, such as furniture
Furniture
Furniture is the mass noun for the movable objects intended to support various human activities such as seating and sleeping in beds, to hold objects at a convenient height for work using horizontal surfaces above the ground, or to store things...
, consumer electronics
Consumer electronics
Consumer electronics are electronic equipment intended for everyday use, most often in entertainment, communications and office productivity. Radio broadcasting in the early 20th century brought the first major consumer product, the broadcast receiver...
and home appliance
Home appliance
Home appliances are electrical/mechanical machines which accomplish some household functions, such as cooking or cleaning. Home appliances can be classified into:*Major appliances, or White goods*Small appliances, or Brown goods...
s, is leased in exchange for a weekly or monthly payment, with the option to purchase at some point during the agreement. Differing from traditional methods of purchase, rent-to-own transactions are not obligations to purchase, since the agreement can be terminated by the lessee at any point in time with the return of the property. The usage of rent-to-own transactions began in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
, and first appeared in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
during the 1950s and 1960s. While rent-to-own terminology is most commonly associated with consumer goods transactions, the term is sometimes used in connection with real estate transactions.
History
The concept of rent-to-own transactions first emerged in the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and continental European countries
Continental Europe
Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands....
under the hire purchase
Hire purchase
Hire purchase is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, South Africa, Australia, Jamaica and New Zealand. It is also called...
model. One of the first rent-to-own retail stores established in the U.K. was Lotus Radio, which began operating as a radio rental business in 1933. Within the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the practice of retail-based rent-to-own businesses began to develop in the 1950s
1950s
The 1950s or The Fifties was the decade that began on January 1, 1950 and ended on December 31, 1959. The decade was the sixth decade of the 20th century...
and 1960s
1960s
The 1960s was the decade that started on January 1, 1960, and ended on December 31, 1969. It was the seventh decade of the 20th century.The 1960s term also refers to an era more often called The Sixties, denoting the complex of inter-related cultural and political trends across the globe...
. Individuals cited as key figures in the history of the rent-to-own transaction and application as a business model include Charles Loudermilk, Sr., who in 1955 began renting out Army surplus chairs and later founded Aaron Rents, and J. Ernest Talley, who started Mr. T’s Rental in Wichita, Kansas in 1963, and later helped establish Rent-A-Center
Rent-A-Center
Rent-A-Center is an American public furniture and electronics rent to own company based in Plano, Texas. The company was incorporated in 1986 and as of 2010 operates 3,007 company-owned stores in the United States, Canada, Puerto Rico and Mexico, accounting for 38% of the rent-to-own market in...
.
Transaction structure
Rent-to-own agreements are based on a weekly or monthly rental term. In the structure of this type of transaction, the consumer (lessee) - at the end of each week or month - can elect either to renew the leaseLease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
on a weekly or monthly basis by making renewal payments, or to terminate the agreement with no further obligation by returning the tangible property. Though not obligated to do so, the consumer can choose to continue making interval payments on the merchandise for a pre-specified period of time, at which point they would own the good outright. An alternative purchase option is commonly provisioned for, allowing the consumer to pay off the remaining balance on the agreement at any point in time in order to obtain permanent ownership.
According to a Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
survey on the rent-to-own industry in the United States conducted in the year 2000, consumers reported that they elected to engage in rent-to-own transactions for a variety of reasons, including “the lack of a credit check”, “the ability to obtain merchandise they otherwise could not”, and “the convenience and flexibility of the transaction”. The most common reason cited for dissatisfaction within the survey was high prices. In addition, some survey respondents reported poor treatment by employees in connection with late rental payments, problems with repair services, and hidden or added costs.
The cost incurred by consumers in rent-to-own transactions has been the subject of long-term debate and differing opinion. Historically, consumer advocates, some U.S. state attorneys general and some academic researchers have expressed concern that consumers entering into rent-to-own agreements may be unaware of the potentially high long-term costs of rent-to-own in comparison to traditional installment
Installment credit
Installment credit is a type of credit that has a fixed number of payments, in contrast to revolving credit.-Examples:* Land loan* Home construction loan* Home mortgage* Some equity loans* Home improvement loan* Automobile loan...
or layaway
Layaway
Layaway is a way to purchase an item without paying the entire cost at once. However, rather than taking the item home and then repaying the debt on a regular schedule, as in most installment plans or hire purchases, the layaway customer does not receive the item until it is completely paid for...
plans. Often mentioned alongside most critiques is the question of whether prices paid for services of this type are adequate for lower-income individuals who can least afford additional financial outlays. At the same time, other academic researchers and representatives of industry associations have contended that rent-to-own transactions are not comparable to traditional methods of purchasing or financing
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
consumer goods, in that they include services such as delivery, assembly, service and repair, all of which are factored in to the higher assessed value and corresponding price charged. Also frequently noted by proponents of the unique nature of rent-to-own transactions is the point that they are not obligations
Obligation
An obligation is a requirement to take some course of action, whether legal or moral. There are also obligations in other normative contexts, such as obligations of etiquette, social obligations, and possibly...
to purchase, since the agreement can be terminated by the lessee at any point in time with the return of the property. Research conducted by the University of Massachusetts Dartmouth
University of Massachusetts Dartmouth
The University of Massachusetts Dartmouth is one of five campuses and operating subdivisions of the University of Massachusetts . It is located in North Dartmouth, Massachusetts, United States, in the center of the South Coast region, between the cities of New Bedford to the east and Fall River...
in 2003 found that 90% of rent-to-own merchandise is returned with less than 36% of the scheduled weekly payments made, suggesting that transactions of this type are "more frequently used for short-term needs rather than as a method of acquisition."
Lease versus sale
The legal controversy surrounding rent-to-own transactions has centered primarily on the question of whether the transaction should be treated as a leaseLease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
or a credit sale. The industry has contended that the transaction is a lease; while consumer advocacy groups have advocated for the transaction to be treated as a credit sale. As of 2011, forty-seven U.S. states, Guam
Guam
Guam is an organized, unincorporated territory of the United States located in the western Pacific Ocean. It is one of five U.S. territories with an established civilian government. Guam is listed as one of 16 Non-Self-Governing Territories by the Special Committee on Decolonization of the United...
, Puerto Rico
Puerto Rico
Puerto Rico , officially the Commonwealth of Puerto Rico , is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.Puerto Rico comprises an...
, and the District of Columbia have passed laws characterizing the transaction as a lease. Of the five U.S. state supreme courts that have addressed the question, three (Massachusetts
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...
, Arkansas
Arkansas
Arkansas is a state located in the southern region of the United States. Its name is an Algonquian name of the Quapaw Indians. Arkansas shares borders with six states , and its eastern border is largely defined by the Mississippi River...
and Maine
Maine
Maine is a state in the New England region of the northeastern United States, bordered by the Atlantic Ocean to the east and south, New Hampshire to the west, and the Canadian provinces of Quebec to the northwest and New Brunswick to the northeast. Maine is both the northernmost and easternmost...
) concluded that the transaction was a lease. New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
and Minnesota
Minnesota
Minnesota is a U.S. state located in the Midwestern United States. The twelfth largest state of the U.S., it is the twenty-first most populous, with 5.3 million residents. Minnesota was carved out of the eastern half of the Minnesota Territory and admitted to the Union as the thirty-second state...
concluded it was a credit sale based upon those states’ credit laws. A federal district court
United States district court
The United States district courts are the general trial courts of the United States federal court system. Both civil and criminal cases are filed in the district court, which is a court of law, equity, and admiralty. There is a United States bankruptcy court associated with each United States...
in Wisconsin
Wisconsin
Wisconsin is a U.S. state located in the north-central United States and is part of the Midwest. It is bordered by Minnesota to the west, Iowa to the southwest, Illinois to the south, Lake Michigan to the east, Michigan to the northeast, and Lake Superior to the north. Wisconsin's capital is...
also found the transaction to be a credit sale under Wisconsin state law.
As of 2011, no U.S. federal
Federal law
Federal law is the body of law created by the federal government of a country. A federal government is formed when a group of political units, such as states or provinces join together in a federation, surrendering their individual sovereignty and many powers to the central government while...
consumer protection law specifically addresses rent-to-own transactions, but through litigation, efforts have been made in attempt to bring rent-to-own agreements under the definition of “credit sale” in the Truth in Lending Act
Truth in Lending Act
The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...
. However, courts have not, as of 2011, ruled in favor of making this change at a federal level. In 2006, the United States Department of Defense
United States Department of Defense
The United States Department of Defense is the U.S...
labeled rent-to-own a predatory lending practice, defining it as an “unfair or abusive loan or credit sale transaction or collection practice,” along with payday loan
Payday loan
A payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card...
s, title loans, refund anticipation loans and other similar practices. In 2007, the United States Government Accountability Office raised concerns with the methodology and structure of this research. Later in the same year, the Department of Defense ultimately concluded that rent-to-own was not a form of credit and excluded it from its regulation on predatory lending practices.
Collection practices
Consumer advocates and plaintiffs testifying in legal proceedings have at times alleged that rent-to-own stores routinely repossessRepossession
Repossession is generally used to refer to a financial institution taking back an object that was either used as collateral or rented or leased in a transaction. Repossession is a "self-help" type of action in which the party having right of ownership of the property in question takes the property...
merchandise when a consumer is close to acquiring ownership
Ownership
Ownership is the state or fact of exclusive rights and control over property, which may be an object, land/real estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be separated and held by different parties. The concept of ownership has...
. At the time of a 2000 FTC survey, individuals who engaged in rent-to-own transactions reported a “low incidence of late-term repossessions,” which the FTC suggested might be due to the reinstatement rights mandated in most states, as these rights allow consumers to reinstate this type of contract after repossession.
Real estate
While rent-to-own transactions are most commonly conducted in the context of consumer goods obtained at a retail store, this type of transaction also describes a specialized real estateReal estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
agreement. In a rent-to-own real estate agreement, the tenant
Leasehold estate
A leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....
has the option to purchase the real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
at a fixed price within a specific period of time, usually one to three years. As part of the contract, the renter may be required to make a nonrefundable deposit. Occasionally, a portion of the monthly rent paid during the lease period is counted towards the down payment
Down payment
Down payment is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.A loan is then required to make the full...
on the property, often in addition to the monthly rent as a monthly premium that sets the rent above the current market rate. If the tenant is unable to exercise the option to buy, the owner is then free to rent or sell the property to another buyer, or to restructure the contract. Rent-to-own real estate contracts typically become more frequently exercised during housing market downturns, such as the late 2000s financial crisis.
External links
- Rent-to-Own Transactions Testimony. Federal Trade CommissionFederal Trade CommissionThe Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
. July 12, 2001. - "From Poverty, Opportunity: Putting the Market to Work for Lower Income Families". Brookings InstitutionBrookings InstitutionThe Brookings Institution is a nonprofit public policy organization based in Washington, D.C., in the United States. One of Washington's oldest think tanks, Brookings conducts research and education in the social sciences, primarily in economics, metropolitan policy, governance, foreign policy, and...
. July 2006.