Rent-to-own quite alright or right rip off

Posted by Arron Dickens in Personal Finance on 13 February 2015 - Arron is a Product Manager at checkmyfile

A way of purchasing household appliances and electrical goods that many thousands of customers rely on, the rent-to-own model, has now come under fire from MP’s. An all-party parliamentary group on personal finance is calling on the Financial Conduct Authority (FCA) to look into the finance agreements that are put in place when you purchase items through rent-to-own.

A rent-to-own agreement will typically allow you to take home electrical goods on day one, and pay for them in weekly instalments until the item is owned outright. Usually there is also a requirement to purchase insurance for the item, and even extended warranties. It is this aspect of the agreements that MP’s are questioning, as they feel requirements to purchase insurance may add up to mis-selling – as was the case with the banking PPI scandal. It is easy to see why requiring additional insurance may be unnecessary as the consumer may already have adequate home insurance that covers contents such as electrical items. In this case, they have no need to purchase insurance when buying such items and so compelling customers to do so is certainly cause for concern.

Besides the requirement for insurance or extended warranties, the interest rate charged for purchasing items by weekly instalments is typically 64.7% (based on BrightHouse, the largest rent-to-own retailer). This is much higher than other traditional forms of finance, besides short term products such as payday loans. The justification for this high APR is that customers are usually accepted for credit when they might otherwise be declined. Stringent credit checks for bank overdrafts are commonly cited as being the reason for the rise in the payday loan market, and it seems rent-to-own agreements could be the ‘answer’ to more rigid lending criteria for traditional store credit and personal loans.

Bright House is not the only player in the rent-to-own market, but they are by far the biggest with 291 stores in the UK. Other retailers are PerfectHome with 67 shops and the online company Buy as You View. Yvonne Forvargue MP is the chair of the parliamentary group leading the calls for the financial regulator (FCA) to step in and investigate. She states: “Rent-to-own stores like BrightHouse charge inflated prices to some of the poorest people in the country. Customers are often obliged to take out additional warranties and insurance, as a result paying several times the true value of the goods”.

Whilst BrightHouse and others claim they provide a necessary service to those struggling with finances, who wish to pay for expensive electrical goods in small weekly payments, it is worth looking at the true cost of taking out such an agreement. The following example uses the cheapest full size fridge/freezer available on the BrightHouse website as of 12 February 2015 (Beko 55cm EcoSmart Fridge/Freezer), with online prices for other retailers taken on the same day:

BrightHouse retail price £406.40 (includes delivery, installation and insurance)

Co-operative Electrical retail price £301.43 (including delivery, installation and 5 year warranty)

AO retail price £268.98 (including delivery, installation and removal of old appliance)

As you can see, without even considering the APR charged on the finance agreement, the retail price is much higher than other online retailers on this particular product. Even with factoring in any optional extras that other sites offer (extended warranty, installation and removal of old appliance etc), BrightHouse is still at least 33% more expensive for the same item. If you also consider that accidental damage and even breakdowns can be covered by existing home insurance (check with your building and contents insurer), you could be paying close to double the retail price you may find elsewhere.

Applying the 64.7% APR figure to this already increased retail price; the total cost for the above item over the course of the finance agreement would be £780 (based on £5 a week for 156 weeks). Understandably, some customers using this type of rent-to-own agreement may not be able to access the cheapest forms of personal loans or credit cards with long 0% interest periods. However, there are a lot of financial products out there for consumers with a range of credit ratings and incomes, and the vast majority of individuals should be able to find credit at a lower APR. Rent-to-own retailers themselves perform credit checks on consumers and so even they would reject those with the most risky credit ratings. Individuals with active bankruptcies for example would be rejected as a matter of course, as they should not be offered credit products while insolvent.

The highest APR credit cards available in the UK are aimed at individuals with limited credit history or a history of late payments and arrears. These cards tend to have APR’s in the range of 35-40% and low credit limits of around £250-£500 until you have built up several months’ history of prompt repayment. Whilst not everyone who uses rent-to-own retailers will be eligible for credit cards such as these, it could certainly pay to at least apply prior to accepting the high retail prices and APR’s offered by some of the rent-to-own retailers.

Take our previous example of the Beko fridge/freezer. If you were to purchase the item from a typical online shop or high street retailer using a credit builder credit card and repay the card at the same rate as the BrightHouse agreement (£5 a week/£20 a month), it would take around 21 months to clear the balance. This is assuming you are only eligible for the highest credit card rate currently available of 39.9% APR and the highest total price found for the product (£301.43 including delivery, installation and 5 year warranty). Taking the cheaper price we found and an average-rate credit card (around 19.9% APR) you could pay the same amount each month and pay for your goods in full in around 15 months, or less than half the duration of a rent-to-own agreement.

One advantage of a rent-to-own agreement is the ability to make weekly repayments instead of monthly. For some this may make it easier to budget, and is one of the reasons why BrightHouse chief executive Leo McKee defends the finance product offered by the retailer. He says, "Our customers carefully manage their limited resources and appreciate the peace of mind they get from BrightHouse. We are already working closely with our new regulator, the FCA, and are constantly exploring ways to make our offer to customers even more transparent and competitive”.

BrightHouse also says it provides high quality products at competitive prices and reiterated that it is proud to serve its customer base of low income familes. With profit of over £52 million last year across its 291 stores, the rent-to-own model is certainly a lucrative finance agreement to be proud of.

The FCA will be assessing all businesses in the sector later this year, having taken over regulatory duties in April 2014. They will look at how customers are treated (among other issues), before deciding whether rent-to-own agreements can be authorised. The all-party parliamentary commission has stated that at the very least they would wish to see ‘health warnings’ attached to sale agreements for rent-to-own contracts.

"The FCA needs to act now to stop rent-to-own customers from being ripped off," says Ms Forvargue.

How To Get The Best Car Finance Deals

New car sales may have slowed in recent years, with the economy, emissions scandals and Millennials all being cited as the root cause at one point or another. But the number of people choosing to use credit as a means of driving away in a new car continues to rise, according to figures from the Finance & Leasing Association which shows that the new car finance market grew by 15% in July 2018 when compared to the previous year.

Published on 8 Oct 2018 by Kiah Phillips

Full Article

We're Now More Likely To Be Borrowers Than Savers

UK Households are now more likely to be borrowers than savers, with savings at their lowest since 1963, according to a study by the Office for National Statistics. Households are increasingly borrowing more – by taking out loans, car finance, and mortgages – than they are collectively depositing into savings accounts.

Published on 5 Oct 2018 by Sam Griffin

Full Article

The Credit Crunch 10 Years On: What’s Changed?

For many people, especially the those lucky enough to not have been old enough to be directly affected, the economic downturn of 2007-2009 seems like a distant memory. The first iPhone had launched a mere two months before the recession hit, and since then they’ve rebooted the Spiderman film franchise not once, but twice. But more importantly, has enough time passed for the borrowing/lending market to revert to its old tricks?

Published on 26 Sep 2018 by Jamie Mackenzie Smith

Full Article

The Limitation Act 1980 and Debt Time limits

The majority of credit consumers believe that once a debt has been acquired, that debt will remain until the full balance has been cleared regardless of the length of time passed. This may not be the case though, thanks to a little-known piece of legislation known as the Limitation Act 1980.

Published on 19 Sep 2018 by Erika Bone

Full Article

UK Households More Likely to be Borrowers Than Savers

UK Households are now more likely to be borrowers than savers, with savings at their lowest since 1963, according to a study by the Office for National Statistics. Households are increasingly borrowing more – by taking out loans, mobile phones, car finance, and mortgages – than they are actively depositing into savings accounts.

Published on 3 Sep 2018 by Sam Griffin

Full Article

Wonga Administration: What it Means For You

On Thursday 30th August the payday lender Wonga filed for Administration, following a spike in compensation claims and increased pressure on the payday loans industry. This follows a steady decline in this form of lending since the FCA began introducing stricter regulations 2013 in the name of protecting consumers.

Published on 31 Aug 2018 by Jamie Mackenzie Smith

Full Article

How a Baby Name Can Affect Creditworthiness

A lot of preparation (and usually arguing) goes into choosing a baby name – books, ‘top 100’ lists, place names, family names – the list of possibilities is endless. The trouble is, most parents don’t give much thought to the long-term impact of the name they decide on, beyond checking to make sure it doesn’t sound ridiculous when paired with the last name or that when put into initials it doesn’t spell something unfortunate.

Published on 19 Aug 2018 by Jamie Mackenzie Smith

Full Article

The Advantages & Disadvantages of Store Cards

There are a number of reasons you might take out a store card: whether you’re just waiting in-line at the shop and find out you can save on today’s shopping or they offer the promise of making money in the future, these cards regularly find their way into wallets (or phones via an app). Most big retailers offer their own cards, which allow you to take your purchases home – often with a nice discount applied – without having to part with a penny at the till.

Published on 10 Jul 2018 by Tom Blandford

Full Article

What Happens To Your Credit Report When You Move Country?

Moving from one country to another results in a lot of changes and new things – a new place and culture, new job, new people and in some cases even a new language. However, one thing lots of people do not realise is that you will also be starting afresh when it comes to your Credit Report. Credit Reports and the information they contain are country-specific and do not follow you from one country to another.

Published on 27 Jun 2018 by Kirstie Day

Full Article

What To Do If You’re a Victim of Data Breach

Another day, another high-profile data breach, with the morning news bringing word of another leak of personal information that affects millions of consumers. This time it’s the turn of Dixons Carphone - the company behind PC World, Currys and Carphone Warehouse.

Published on 14 Jun 2018 by Jamie Mackenzie Smith

Full Article


We are rated number 1 for customer service on