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Rent-to-Own Consumer Leases

Case Study

Ms A is a single mother with eight children all living with her in department housing.  She grew up in a rural aboriginal environment, and until now has never lived in an urban area.  She receives Centrelink payments as her sole source of income.

Ms A agreed to rent household goods from a man in a local rental company and she told Financial Rights that “everyone in the aboriginal community was using him.”  She ended up renting nearly every item in her house from him.  He told her that she could only pay for her rentals by letting him arrange for all of the payments by direct debit of her Centrelink benefits.  Ms A said she felt like she had no control over the payments, and that the salesman controlled all of the transactions.

Ms A believed that she was renting to own the items in her house as she had been directed by the rental company to go to a particular furniture shop and to choose all her goods. Mrs A had multiple contracts with the same rental company.  After the time she believed a contract had finished she was then advised by the rental company that NO it was a rental contract but if she wanted to purchase the goods she would need to come into the store and pay $100 cash per contract after each contract  had expired. If she stopped any payments then they would come and take the goods.

Ms A never had the $100 cash so she continued with the direct debit payments indefinitely to keep all her goods (most of which had depreciated to be of very little value). Almost all of Ms A’s Centrelink benefits were going through direct debit, and she was left with almost no money each fortnight to pay for food, electricity, clothing, etc., She had incurred rent arrears and eviction hearing was pending and she was being assisted by local charities.

Rent-to-Own or Rent-to-Buy arrangements offer an easy solution to consumers that want to own an expensive good but cannot afford to purchase it upfront. These arrangements are advertised as consumer leases where a consumer can rent a product for a minimum term and then (effectively) take ownership of it.

Our primary concern with Rent-to-Own contracts is that they have often been written in such a way that intentionally avoids being regulated as credit contracts, even though that is what they are in substance. By law, a consumer lease can NEVER give you a right to own the goods that you are renting. Nevertheless, time after time we see examples of consumers that have been told that if they rent goods for long enough they will gain the right to own those goods at the end of the rental period, but then the legal language in the contract says otherwise.

Lease providers have come up with a variety of clever ways to arrange these contracts in order to avoid being regulated as credit providers. If you sign a Rent-to-Own contract that calls itself a “consumer lease” you will not be getting the legal protections that you would if you had simply taken out a loan to purchase the good outright.

Another problem with these arrangements is that they are overpriced. Rent-to-Own contracts are an extremely expensive way to purchase a product. Research has shown that Rent-to-Own arrangements usually cost around three times the price of buying the same goods retail! There are even examples of some products costing up to eight times their recommended retail price. Advertisements of these products rarely indicate how expensive they will be after all of your payments are completed. They usually just list the weekly amount you have to pay. This makes it hard to shop around for the best deal among similar rental schemes, or to compare them to the cost of buying the product outright.

If you’re thinking about signing up with a Rent-to-Own company, proceed with caution. Make sure that you read the fine print because the “devil is in the details” when it comes to consumer leases. Unfortunately, in our experience, the detail can be very hard to find or understand.

Before you sign anything, make sure you are clear about the following:

Ownership: When you have finished making repayments, will you actually own the product? If at the end of the repayment period you only have a right to “buy” the product, how much extra will that cost? Will you be able to buy the actual item you have been using, or will you only be able to buy a ‘similar’ product? Keep in mind you may only be entitled to ‘buy’ the product after two successive leases have been taken out. How much will it cost to buy the product?

Getting locked in: Usually a lease agreement locks you in for a set period of time, regardless of whether you change your mind and want to cancel, or can’t afford the payments anymore. If you want to break the contract early will you be required to pay an early termination fee? Remember there’s generally no ‘cooling off’ period with leases, so don’t sign unless you are sure.

Overall Cost: Make sure you know the recommended retail price of the item you intend to rent. Then figure out the total cost of a Rent-to-Own contract before you sign it. You cannot make an informed decision about renting to own a product until you know the true costs involved (i.e. what the total lease payments plus any ongoing fees will add up to over time).
Defaulting can be disastrous: Under the terms of many Rent-to-Own contracts, if you miss a payment, the company can (and will) repossess your item, but you’ll still be left with the lease, and possibly additional penalties for having missed a payment. You may even be asked to pay out the entire contract immediately.

If there is an expensive product that you want or need to purchase, there are better alternatives than signing up with a Rent-to-Own company.

  1. NILS: If you are a low-income earner you might be eligible for a No Interest Loan: https://www.moneysmart.gov.au/borrowing-and-credit/other-types-of-credit/no-or-low-interest-loans
  2. Centrelink Advance: http://www.humanservices.gov.au/customer/enablers/advance-payment
  3. Personal Loan: Read our Fact Sheet