"They take advantage of poor people. Rent-to-own places are just like payday lenders: they make their money by exploiting the fact that poor people don't have money available right now."
"Is it that different than what any money lender does?" Mrs. Done by Forty asked.
Maybe I was being too harsh on the good people of Aaron's. Were they essentially the same as any other financing option? I mean, I'm not arguing that Best Buy or Sears be boycotted, and they'll finance the exact same stuff as Aaron's sells to their rent-to-own customers. Maybe rent-to-own is a reasonable business model. In any case, I've never even set foot in a store like this. Maybe I should give them a chance.
So I went to Aarons.com, found a television, and requested a quote. In a sneaky tactic, the company's website doesn't let you see prices: you have to enter in your information, and a sales associate calls you back with the quote. (And presumably, a pitch.) I didn't want to give my real information, so I called the store. Here's the breakdown the sales rep gave me on a Samsung 55" HD television:
- The TV could be purchased for $79/month for 24 months. This works out to $1,896 over two years.
- There is an option to buy the television for $1,200 within the first four months. After the fourth month, the total purchase price would be the $1,896, even if paid for earlier than the 24 month term, or in a lump sum.
- The price does include warranty service, setup, and delivery.
- However, this model can be had for less than $800 from Amazon, so it's a terrible deal no matter how you slice it.
Rent-to-own, at least in this situation, is much worse than even a typical financing situation. For one, the initial price of the television is about 50% higher than what you could find in a traditional, cash-up-front purchase from an online retailer when using a credit card. Second, when you calculate the total cost owed on a $1,200 television, it ends up costing $1,896 over two years with $79/month payment. The "interest" owed would be about 48% on a two year loan. (Though the Aaron's salesman noted that it's not really interest, since it's a rent-to-own situation and not financing.) Still, a rose by any other name still ends up costing you an extra thousand dollars.
Why Would Anyone Do This?
Back to the conversation my wife and I were having. Considering how bad a deal this was, I was honestly confused about why anyone would ever shop at Aaron's. Mrs. Done by Forty wasn't.
"They just don't have the money to buy the furniture or the television," she said. "And they can't get traditional credit."
"So why not just get a used television or used furniture on Craigslist?"
"Because they probably don't even have a few hundred dollars right now, and they don't want something used anyway. They want something new. It's just something they can't afford."
As usual, my wife had the insight that I rarely do: people rent-to-own new things because they want something new, whether or not they can actually afford it. Aaron's and Rent-A-Center, along with Amazon and Sears and any other number of retailers, aren't banking on customers like me. Their customers don't want a two-generation old television or a gently used couch purchased from some stranger on Craigslist. Their customers actually want something new, and nice, too: just as nice and new as some upper middle class yuppie would buy in cash. The rub is that, presumably, they don't have the cash. So what do they have?
Income vs. Wealth
The working poor (and the working middle class) might not have a lot of cash lying around, and perhaps no wealth at all to speak of. But they do have something of incredible worth: an income. Working people have a paycheck coming in every couple weeks or every month. They might have a negative net worth; but they also have significant purchasing power in the form of future income. Rent-to-own retailers and financiers are catering to that side of the dichotomy: the people who have little cash on hand, but hundreds of thousands, or millions, of dollars coming in regularly over time.
Not to get all Marxian, but if all you have is your income (or labor), you're in a crap position to make large dollar purchases. You can save for months and years and buy something at the end of that period. Or, you can get the thing you want now, via rent-to-own or financing, and pay much more for it over a longer period of months and years. Logically, saving up and buying later is often a better option. But as Jason Hull might say, Monkey Brain doesn't like that answer. Our base instinct is to get the stuff we want right now, and to pay for it later. When we give into this instinct, we become more reliant on our income and place an anchor on our plans to get ahead financially. The act of using future income to pay for past purchases prevents us from building wealth.
What Should We Do?
If I had my druthers, I'd want our state to outlaw rent-to-own stores in the same way, and for the same reasons, that we outlawed payday lenders. As of 2010, it is illegal in our state to provide payday loans or to charge more than 36% interest on loans less than $1,000. If we are comfortable with the precedent that certain businesses (payday lenders, drug dealers, prostitutes) or practices aren't allowable because they harm our citizens, why would we allow rent-to-own businesses to operate in our neighborhoods?
My wife takes a more measured stance. Today she asked me how rent-to-own was really that different from taking out a car loan. The premise is the same: the purchaser wants something he cannot afford in a lump sum, so he trades his future income in order to get the material good right now, paying much more over a period of years. Isn't the borrower essentially buying a car on a rent-to-own model? After all, you don't actually own the car (i.e. - you don't get the title) until you make your final payment. And isn't there greater financial damage caused by car loans than by rent-to-own couches?
I'm torn on the issue, especially since there's zero chance voters or politicians will outlaw car financing. But I naively think that if we can get rid of payday loans, we might be able to do the same with rent-to-own businesses.
What do you readers think? Is it best to let the market operate without interference, trusting businesses and consumers to make decisions that are in their best interests? Or is protection for consumers justified?
*Photo is from Steve Snodgrass at Flickr Creative Commons.