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Rent-to-own (RTO) is an informal term for a type of retail storefront businesses which rents assets or items, most typically furniture or home appliances, with the condition that the item will be owned by the renter if the term of rent is finished, or that the lease can be converted to a sale for a nominal fee at that time. The term may also apply to transactions concerning real estate or commercial or industrial equipment, although these areas may present issues that are substantially different from those of the storefront furniture and home appliance segment.


Furniture and appliances

The United States Department of Defense considers rent-to-own a predatory lending practice (defined as an "unfair or abusive loan or credit sale transaction or collection practice"), and groups it with payday loans, title loans, refund anticipation loans and other similar practices.[1]

The RTO industry alleges that RTO is a lease, as opposed to a credit sale, and argues that no interest is charged.[2] This issue is in dispute, as advocates for low-income consumers have successfully defeated attempts by the RTO industry to change the laws of New Jersey, Minnesota and Wisconsin, for example, to become industry-friendly.[3] Recently, the RTO industry lost a major lawsuit in the New Jersey Supreme Court.[4][5] The court held that its practices are subject to the state's 30% criminal usury ceiling.

Even more recently, the Massachusetts Supreme Judicial Court sided with the RTO industry when it reviewed the legal status of rent-to-own agreements in that state.[6] The court held that RTO agreements are true weekly rental contracts, not purchase and sale agreements, with the renter’s sole payment obligation being to pay for the first week’s rent. Neither the renter’s option to renew from week to week thereafter nor the option to purchase sufficed to convert the RTO agreement into an installment purchase and sale agreement, in the court’s view. Drawing in part on analogous federal law, the court held that the consumer was therefore not buying on credit or incurring any debt, and hence interest rate laws regulating installment sales contracts are inapplicable to RTO agreements. The court found no assistance in the reasoning of the courts of New Jersey and Wisconsin, two of only three states without RTO statutes, because the credit sale laws of both those states are framed in broader terms than that of Massachusetts.

Since rent to own stores often do not require payment up front, they are popular with the poor, but between high interest rates and higher cash prices than other stores, they are more expensive (often several times more expensive) than buying the same item outright. This has caused the rent to own industry to be accused of predatory lending.[7][8][9] Industry-wide, 75% of all RTO transactions are weekly; the consumer agrees to pay a weekly amount for leasing property. The remaining 25% of agreements are biweekly and monthly. RTO agreements are generally written for a 12-, 18-, or 24-month term. If the consumer rents the merchandise for the full term, ownership is acquired. Most RTO transactions include an early buyout clause that allows the consumer to purchase the merchandise at any time during the term for 50% of the remaining rental payments.

A consumer may return a rental item at any time without penalty. Most companies have a lifetime reinstatement clause, allowing the consumer to re-rent a returned item (or similar item) and receive full credit for all previous rental payments made.

Real estate

Rent-to-own is also a real estate term relating to a real estate agreement which is composed of a rental lease and a purchase agreement where the tenant has the option to purchase the property at a fixed price at a specified point of time in the future. It is also known as lease to purchase option, lease option, a type of owner financing or lease-to-own.

The lease resembles that of a typical rental lease where the land owner, the lessor, allows the other party, the lessee, to occupy the property in return for a monthly payment. The option to purchase the property usually states the price at which the property is to be bought and the time period during which the tenant is able to exercise the option.

Rent to own contracts typically become more popular during housing market downturns as property sellers may need to vacate the property before it can sold, and landlords may use them as a way to find good tenants.[10] The seller may attract the tenant by having a specified portion of the rent applied as a credit toward a down payment on the house, or may receive a bulk sum of money for the option giving the tenant time to rebuild their credit if necessary.


Problems with rent to own

  • As a buyer, if you choose not to buy the home you could lose some or all of the option fee
  • As a seller, the buyer could back out of the transaction and not buy the home
  • As a buyer, a rent increment might be put on top of the typical lease payment to cover the portion going towards the down payment.[11]

Advantages of rent to own

  • Tenant/Buyers are able to put money towards the purchase of their home through upfront option fees and rental credits
  • Tenant/Buyers are able to overcome possible poor credit situations
  • Can help landlords find tenants in a down market and secure a good return on their investment
  • Tenant/Buyers usually have longer Lease terms than traditional renters, reducing vacancies, and vacancy costs for the Seller/Landlord
  • Tenant/Buyers typically maintain the property through the lease term, reducing maintenance expenses and time spent for the Seller/Landlords
  • Seller/landlords can begin to dispose of a property which no longer meets their property ownership requirements.
  • Tenant/Buyers are able to 'lock-in' the sale price of the property when signing the agreement and enjoy the benefits of potential appreciating market values over the term of the contract upon exercising the option.
  • The monthly rental repayments may be fixed for the full term of the contract so rental rate increases will not affect the renter/buyer.

Problem: The predatory rent-to-own industry promises consumers the American dream of ownership. "For only 78 weekly payments of $10, you, too, can own this television." The industry doesn't tell you that the that the effective interest rate on that loan, however, is 220%APR with $560 in iterest and finance charges.

Many states have enacted industry-friendly laws that allow the rent-to-own industry to deceive consumers by disguising their loans as rentals. But a few states enforce tough consumer protection laws. New Jersey PIRG has helped defend its strong law for years.

Unable to win in the state legislatures, the RTO industry has asked Congress to preempt, or over-ride, those strong state consumer protection laws and replace them with a weak industry-friendly federal law.

Industry today

The concept of rent to own is not new, but with the credit markets and housing crash, these contracts are becoming much more popular.[12] In the first 11 months of 2007, roughly 700 homes were listed on the Charleston Trident Association of Realtors' Multiple Listing Service as available through rent-to-own contracts. This made up roughly 3% of the total listings which was significantly greater than the 1% it made up in 2006.[13]

See also


  1. ^ "Outline for Report to Congress" (PDF). Retrieved 2009-10-18. 
  2. ^ "About Rent-to-Own". Association of Progressive Rental Organizations (APRO). Retrieved 2008-04-17. 
  3. ^ "Rent-To-Own Stores" (PDF), Wisconsin Briefs (Legislative Reference Board, Wisconsin State Legislature), 2004,, retrieved 2008-04-18 
  4. ^ "Microsoft Word - A-124-04-PEREZVRENT-A-CENTER.DOC" (PDF). Retrieved 2009-10-18. 
  5. ^ "N.J. Supreme Court rules against RAC", Furniture/Today 30 (29): 38, 2006-03-27, ISSN 0194-360X 
  6. ^ Silva v. Rent-A-Center, Inc., 454 Mass. 667 (2009) FindLaw. Retrieved 2009-10-21
  7. ^ "Predatory Rent To Own Stores". Federation of State Public Interest Research Groups. Retrieved 2008-04-18. 
  8. ^ "Predatory lending: There ought to be a law". CNN. Retrieved 2008-04-18. 
  9. ^ Carr, James H.; Jenny Schuetz, Lopa Kolluri (2001-08-27) (PDF). Financial Services in Distressed Communities: Issues and Answers. Fannie Mae Foundation. Retrieved 2008-04-18. 
  10. ^ Bigda, Carolyn (2008-03-09). "Lease-to-own homes enter in down market - Condos and Houses, Brooklyn (King's, New York) -".<!.,0,2706749.story. Retrieved 2009-10-18. 
  11. ^ Bigda, Carolyn (2008-03-09). "Lease-to-own homes enter in down market - Prosecution, Brooklyn (King's, New York) -".<!.,0,2706749.story. Retrieved 2009-10-18. 
  12. ^ Photo by Mic Smith (2007-11-12). "Charleston, SC Latest Business News: Rent-to-own home deals surge in popularity". Retrieved 2009-10-18. 
  13. ^ [1]

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