Paying the Most to Buy on Time : Rent-to-Own Stores’ Deals Not Covered by Credit Laws
It’s a deal consumer groups say is too good to be true: a brand-new, $300 VCR for just $12.99 a week, no credit needed. Hang on to it for 20 months and you’ll own it, free and clear.
The total cost: more than $1,000.
Low-income consumers enter into such transactions every day, but consumer advocates say it is a costly way to acquire goods without any of the safeguards of standard credit arrangements. Spurred by consumer activists’ complaints, federal and state legislators are considering new regulations to ensure these customers some measure of protection.
Though rent-to-own customers acquire goods through periodic payments, such transactions are not legally credit and the stores are not required to disclose interest rates. Nor are they subject to usury statutes in states that put a cap on interest rates, even though their effective rates can range from 30% to 300% or more.
Rental-purchase merchants say the proposed regulations would be unfair because the merchants are not extending credit.
“It’s just 100% wrong to restrict us the way they want to,” said Greg Daum, co-owner of Ace Rentals near the Watts neighborhood of Los Angeles. “It completely ignores the opportunities we provide people to get things they can’t buy from other stores. (The critics) have given no real thought to the actual customers.”
Through a quirk in the law, most rent-to-own stores are not subject to federal lease laws covering contracts such as long-term automobile lease-purchase deals. Those contracts require detailed disclosure of total cost and payment terms.
The federal lease law is triggered by the length of the contract. Rent-to-own companies peddling appliances, furniture and electronic gadgets escape the law because their contracts are structured so that the actual rental period is only a week or a few months. They entice the customer to keep renewing the rental with the promise of eventual ownership.
“It’s outrageous,” said Mary Raftery, legislative director of the California Public Interest Research Group. “The whole rent-to-own industry has built itself up around gaps in federal and state law which let them charge exorbitant rates for their products.”
House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) last week introduced a bill that would tighten restrictions on the growing, $3.9-billion-a-year rent-to-own industry.
Gonzalez held hearings on alleged abuses in the industry in March and, in introducing his bill, cited a recent Wall Street Journal article detailing criticism of the industry nationwide.
The Gonzalez bill and similar legislation expected to be introduced in the Senate by Sen. Howard M. Metzenbaum (D-Ohio) would classify rent-to-own deals as credit sales rather than leases.
Although rent-to-own stores offer the same goods for direct sale, they do not offer standard credit contracts as an option. Moreover, their marketing tends to stress ownership rather than short-term rental, consumer advocates say.
Early next year, the California Legislature is scheduled to consider a bill sponsored by Assemblywoman Betty Karnette (D-Long Beach). It would treat rental-purchase agreements as installment sales and require that interest rates be prominently displayed on the merchandise.
Under both the federal and state proposals, renters would have to be told the actual interest cost and the total of payments over the time required to gain ownership.
Under the federal proposals, renters would also be entitled to product warranties and protection from abusive collection tactics.
The rent-to-own industry serves about 3.6 million customers nationwide.
In California, about 400 stores generated $156 million in revenue last year. About a quarter of them are in Southern California, according to trade association figures.
It is an industry that thrives in inner-city neighborhoods where incomes barely cover necessities and substantial cash purchases are impossible for most residents--and where difficulty in keeping up with bills marks many consumers as poor credit risks.
Industry representatives say rental-purchase agreements are popular because they impose no debt and generally offer free product service and installation. If a renter grows tired of an item or can’t make the payments, he or she can simply return it, no questions asked.
“Our average customer is a working person in a period of transition in their lives,” said Bill Keese, executive director of the Assn. of Progressive Rental Organizations. “Some are moving from one area to another, some are in financial transition.”
Keese said that about 79% of the time, renters do not end up buying what they rent. He said the average rental period is about four months.
The California Department of Consumer Affairs and other sources dispute those figures, however. They say most customers are in it for the long haul and that the industry lures poor people with seemingly sweet deals that can quickly turn sour.
Some customers without credit say they see no alternative.
“I could not afford it any other way,” said Maria Gutierrez, who rents a set of two couches for her Highland Park apartment. Gutierrez, a 20-year-old mother of two, pays $25.99 a week. “When you don’t have a credit card, that’s what you do,” she said.
But renters such as Gutierrez don’t necessarily build equity through making the payments. A customer who is renting with the intent to own is not legally entitled to credit for past payments if the payments stop temporarily for any reason. In practice, many in the business say they do let customers pick up where they left off.
Missing payments can result in automatic repossessions not governed by federal codes designed to prevent harassment by creditors.
“The core problem is that rent-to-own is not covered by laws on credit sales, so there’s plenty of room for abuse,” said Edmund Mierzwinski, a consumer activist who testified before Gonzalez’s committee.
Industry representatives say they favor a disclosure bill sponsored by Rep. Larry LaRocco (D-Ida.). It would extend nationwide laws in effect in 36 states--excluding California--that require disclosure of the total cost of each rental-purchase contract.
A key difference between the LaRocco legislation and the bills offered by Gonzalez and Metzenbaum is that disclosure of actual interest rates would not be required.
“We don’t force anyone into debt, so we shouldn’t be regulated like a business that does,” Keese said.
While disclosure of the total price and interest rates might turn away many customers, some say they will stick with the stores because of their flexibility.
“For me, I like doing it this way,” said Rico Lopez, a truck driver in Hawthorne. “I know it costs more than in the big stores, but I’m going to Mexico for a four-month vacation in December, so I didn’t want to lock myself, or my sister, into debt.”
“I’m all for proper disclosures,” store owner Daum said. “If there are rental dealers who abuse people, those dealers need to change and should be made to. But you don’t do that by killing an entire industry. All that’s going to do is hurt the customers everyone’s trying to help.”
Renting to Own
Consumers who purchase household goods through rent-to-own stores pay far higher prices and effective interest rates than those able to buy comparable merchandise for cash or through standard credit arrangements. The following are comparisons of the cost of acquiring a washing machine at selected rent-to-own outlets in some California cities and the cash prices charged by the same store. Used Washing Machine:
Total Cash Mo. No. of Location rent price pymt. pymts. APR* Los Angeles $1,710 $970 $95 18 82% San Diego $1,050 $475 $70 15 145% Oakland $840 $299 $40 21 146% Escondido $720 $150 $40 18 350%
*
Consumers able to pay cash for a used washer would still pay more at a rent-to-own store than from another source. Location: Rent-to-Own Price range: $125-$970
*Location: Washers available in daily newspaper classified ads Price range: $50-$400
*Location: Weekly newspaper classified ads Price range: $45-$75
*Location: Thrift stores Price range: $50-$250
*Location: Appliance repair shops Price range: $100-$250
*Location: Appliance rental stores Price range: $125-$135
*Effective annual interest rate.
Source: California Public Interest Research Group
