Helbing Law Office Logo by Timothy Helbing located in Appleton, WI serving chapter 7 and chapter 13 bankruptcy

What’s in a name?

When you decide to buy something, you may decide to use a credit card or obtain a loan. But there is another option. It is known as “rent to own,” and it looks a lot like an installment loan or a revolving credit agreement. You make regular monthly payments for the item, and if you complete the full term of the agreement, you then own the item.

There are some differences. If you can’t pay, you can return the item. When you regain your ability to pay, you can then reclaim the item and begin making payments again. This seems like a “good deal,” as unlike a loan for something like a car, you are not on the hook for the value of the loan regardless of the value of the item.

If you have a $20,000 car loan and lose your job when you still owe $15,000, the finance company will repossess the vehicle and likely sell it for less than the loan value. Because of the terms of the loan, you are still responsible for any difference between their selling price and the outstanding balance of the loan. This is why many people file bankruptcy, as its discharge protects them from these types of collection efforts.

However, the rent to own agreement does have a downside. If you “buy” a television using this method, instead of costing you $300, it may cost you $2,000. In almost all cases, the consumer would be better off putting away the same amount of money as the agreement would require and at the end of a year or two, purchasing the item outright for cash.

Rent to own agreements have been criticized as preying on low-income individuals who would not qualify for credit or perhaps have had financial difficulties and subjecting them to as high as 100 percent interest rates. Companies that offer them are able to evade most financial regulatory laws because they are viewed as rental agreements and not loans.

If you don’t know how much it will cost in the long-run, it may not be the good deal it appears.

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