Yesterday, a local talk radio show did a segment on the ethics behind car title loans and rent-to-owns. The host, one J. Michael McKoy, argued that such services are vital for low income families, while his more sensible sidekick was arguing vehemently against them. The callers were a motley crew of various opinions, as you would expect from a local call-in show, but for some reason I was persuaded to pick up the phone and call in to set the record straight – and maybe drop a quick plug for The Simple Dollar.
Unfortunately, I was unable to get on the air before the end of the segment, but the segment irritated me enough that I wanted to go home and debunk some of the more common arguments in favor of the use of car title loans and rent-to-own outlets.
How Does Rent To Own Work?
A rent-to-own outlet is a place that rents out home appliances with the option of purchase after a certain period of time. Typically, the payment system is similar to a video rental, and similar in proportion. Here’s an example: one rent to own outlet, Bestway, offers a Compaq Presario notebook with an AMD Sempron Processor 3400+, 512MB SDRAM, 80GB hard drive, DVD/CD-RW Combo Drive, 15.4″ widescreen display, and a 802.11 wireless card. You can rent it for $39.99 per week or $139.99 per month, and at the end of 24 months on either plan, you’ll own the item. Meanwhile, you can spec out a very similar system from Dell for approximately $541. If you sign up for Dell’s payment plan, you can make payments of roughly $26 per month for 24 months.
So what’s the advantage of the rent-to-own system? Basically, there is no advantage – you often choose to make three to four times the payments that you would if you bought the item directly. In both cases, the item is delivered to your home. In both cases, you’re expected to make timely payments. In both cases, the item will be repossessed if you don’t make the payments. The only advantage of the rent-to-own system is that your credit won’t be dinged if you stop paying – it’s much like a late rental.
Why do people fall for this? Typically, the sales pitch involves the fact that it’s just like a video rental except you get to keep it at the end. Just pay the “rental fees” and you can use it, and if you keep “re-renting” it, you can keep it. The truth is that you’re just making very high payments on an item.
If you’re ever tempted to go to a rent-to-own outlet, stop. I guarantee that you can find a nearly-identical item on amazon.com for 30% or less of the total price you’d pay at a rent-to-own outlet.
Payday Loans and Car Title Loans
I am ever slightly more sympathetic towards car title loan places, simply because I understand the desperation that low-income individuals can sometimes face (my child is in the hospital and we have nothing), but there are many, many other options. A car title loan is a short-term high interest loan that individuals can get by using their lien-free car title as collateral. Many title loan lenders have interest rates that approach 10% per month, which figures up to over 100% annually. The intention of the loan, however, is that it will be paid back on the next payday.
Most of us have many, many other options if we need money in a pinch. We can tap a home equity line of credit or use a credit card for a purchase. Even a credit card cash advance is a much better deal than this if you need cash quickly. If you’re at a point where a title lender is your only option, you should seriously begin to consider bankruptcy or at least a visit to a credit counselor, because you are facing some serious financial ills.
If you’re ever tempted to go to a car title loan center, stop. If you have any credit available from your home equity or any credit card, using that to get cash is a better deal than this.
In short, I generally feel that both businesses prey on the financially weak among us, and the existence of both businesses points to an amazing lack of financial education, particularly among those who need it most.