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.

If you have a subscription to checkmyfile, you may know that we already match you to credit cards that you should be able to get. If you aren’t a customer and have no interest in getting your credit file, we can still show you cards that you should be eligible for – simply check out our find a credit card section.

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.

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