iii' ~=~~~=_~_=o Rent-To-Own: Still Costly for Consumers

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1 Rent-To-Own: Still Costly for Consmers Adrianne O. Vidrine, Loisiana State University Agricltral Center Frances C. Lawrence, Loisiana State University & Loisiana State University Agricltral Center The rent-to-own (RTO) indstry is a $5.3 billion-a-year bsiness of dealers who rent frnitre, electronics, major appliances, compters, jewelry, and other prodcts with an option to by. The average store has 587 items available for rent at anyone time (Association of Progressive Rental Organizations [APRO], 2002). Rentals are normally for one week or one month. At the end of the week or month, the consmer can terminate the agreement or renew the contract by making another advance rental payment. If the consmer makes a timely payment for a continos term, generally months, ownership of the item is transferred to the cstomer. The prpose of this paper is to present an overview of the RTO indstry, profile ofsers, comparison ofrto prices and retail store prices, and laws reglating the contracts. Implications for consmer edcators and sggestions for incorporating this consmer isse into edcational programs are offered. Rent-to-Own Indstry Rent-to-own transactions have existed since the 1960s, with stores now located in all 50 states. In recent years the indstry has experienced consolidation with large mlti-store chains acqiring smaller operations (Martin & Hckins, 1997). Despite consolidation, the nmber ofstores has grown to 8,000 serving more than 3 million hoseholds (APRO, 2002). RTO retailers have added several new marketing featres (PR Newswire, 1999a, 1999b, 2000). Consmers can now visit Web sites of RTO stores, select merchandise, and complete the contract sing an on-line form. Corporate staff assigns the order to the appropriate store based on the consmer's location. Consmers also can se in-store, iii' s. == =o -105

2 mltifnction ATM-X machines where, in addition to the standard ATM fnctions, they can cash checks, pay bills, get prepaid phone cards, and prchase prodcts and services with cash. A few RTO retailers offer weekly Internet services to cstomers with no longterm commitment. Profile of Users Indstry representatives sggest most of their cstomers are employed Cacasians with incomes between $24,000 and $49,999 (APRO,2002). However, consmer researchers fond low-income consmers are more likely to se RTO than other poplation grops (Lewis, Swagler, & Brton, 1997; Martin & Hckins, 1997; Zikmnd-Fisher & Parker, 1999). Reslts of a recent Federal Trade Commission (FTC) srvey indicated that 59% of RTO consmers had incomes less than $25,000 and 31% were African American (Lacko, McKernan, & Hastak, 2000). Zikmnd-Fisher and Parker fond women, yonger sbjects, and less-edcated respondents were more likely to demand rental-prchase services. Garman (2002, p. 99) reported that RTO stores most likely are located in poor inner city and rral areas, with 20% of the cstomers at one of the largest companies being nemployed and receiving government aid. Consmers se RTO retailers becase of accessibility, no credit checks, no down payment, no long-term financial obligation, freedom of responsibility for servicing the merchandise, and free delivery (Hill, Ramp, & Silver, 1998; Anderson & Jackson, 2001). Lacko et at. (2000) reported that 75% of RTO cstomers were satisfied with their experiences for a nmber of reasons inclding favorable aspects of the transaction, merchandise, services, and treatment received from store employees. Anderson and Jackson frther stated that althogh not all consmers benefit from the additional featres, it is possible that one or more of the featres may make RTO advantageos over installment credit for some cstomers. The RTO indstry reports that 75% of cstomers retrn the rented item within the first for months and fewer than 25% rent long enogh to own the item (APRO, 2002). However, Lacko et al. (2000) fond that 90% ofthe merchandise on which cstomers had made payments toward ownership for at least six months was prchased. Likewise, Zikmnd-Fisher and Parker (1999) fond 76% of cstomers reported completing the contract and obtaining ownership. Rent-To-Own Prices Verss Retail Store Prices Consmers freqently are naware of the high costs of RTO transactions (Martin & Hckins, 1997). A nmber of states allow RTO retailers to charge add-on fees for services sch as reinstatement, in-home collection, processing, damage waivers, and property insrance. Ths, a major concern of consmer advocates has been that RTO cstomers pay mch higher prices than if they had prchased the same goods in retail stores (Hill et al. 1998; Lacko et al., 2000; Lewis et al., 1997; Martin & Hckins, 1997; Mierzwinski, 1997). In Jly 2001 the athors condcted a comparison of RTO costs to retail store costs in a rral location in a sothern state (see Table 1). Two televisions, a VCR, a refrigerator, a washing machine, and a small stereo were sed for comparison. All items were similar in size, qality, and featres. Three RTO stores and three retail stores were visited to obtain price information. In addition, an employee at each RTO store was interviewed. Since consmers can pay cash for merchandise at RTO stores jst as they can at other retail establishments, the athors compared RTO cash prices and retail store cash prices. RTO prices were 1.2 to 2.4 times higher than retail prices (see Table 1). Next, the price

3 ) ) ofa completed rental-prchase contract to the cash (no credit) price -::::.._c.o at retail stores was compared. As in past stdies condcted in rban '"0...c: ::c OC) r o N rr; areas (Mierzwinski, 1997; Virginia Citizens Consmer Concil & r<) r<) r<) '<t: I 5 c N ::c E: 0 Virginia Poverty Law Center, Inc. 1997; Walden, 1990), RTO!..ecJ). <:1:-:; prchase prices were 2.6 to 4.6 times higher than retail prices (see o ""d C.. o Table 0, It shold be noted that the additional vale of the RTO 0\ r<) r<) OC).e '" ljl r r r<) 0\ r O\I <r:: E: ""d featres sch as delivery, maintenance and repair, and \.f> 8 r- N -.r ljl N c.o C weekly/monthly payments were not taken into accont; however, 0: '" '" OC) -.r 0\ 0\,... OC) is Anderson and Jackson (200 1) reported that RTO prices are still high c.o ljl r.;::: o o 0\ r<) \.f> OC) -.r '" c '" C "'" C c... o n n d- en "\ 0 even when the vale of the additional services are inclded. if) o -.r,... -.r 0\ r ;;; 0 c \.f> r<) r<) r<) <r:: s 6 ""d ;;... Legislation -;:: o -:::: ""d ::l 0._c.o '" c: c ::c o I e '" 0\ ljl OC).- Consmer advocates have expressed that the RTO indstry N N N c -.r '" c.o E: 0 C shold be governed by the Trth in lending Act or Trth in Leasing._...c: r o. [--<, ;;... '" '" Act (Martin & Hckins, 1997). However, they have been '".;::: o o c... [--< 0 nsccessfl in having these federal laws apply to RTO transactions. OC) N ljl 0\ if) '" -.r,......c: ;;. 0 0\ 0\ r<) -.r o t;,... N 1.1"'. 0 c N r<) '" 0\,... Since cstomers contract to pay a weekly or a monthly rental for <r:: r-. :s U merchandise rather than for the vale of the goods, the contract...c: r<) o r r r r<) OC) if) '" c.o o does not meet the Trth in lending Act's definition of a credit sale ljl ljl OC) N r- ""d. c '" C,...,...,... o 2; et? C U 6 en N N. 00 (Martin & Hckins), The Consmer Leasing Act applies to -.r N r- r r r- c v) p.. N r<) r- OC) ""d ljl C...c: consmer leases that obligate the consmer for more than for C a C '". months. Since a key featre of RTO contracts is that the consmer r o o r<) '" IU. o '" ;;. 0 -.r,... o r r<),... 0\ o is not obligated beyond the initial one week or one month rental, N r<) <r:: -.r ::s [--< if) CO -" the Consmer Leasing Act does not reqire disclosres (National. o o o o '" :>... c.o 8 N r Institte for Consmer Edcation, 200l). N N,... o 't 't CO 0: '" 0 '" o C.;::: '+< o,... 6 ""d In the absence offederal reglations and to help stop consmers ljl r<) o if),... o o OC) 0... N r<) -.r,... -g c from being nknowingly overcharged (Garman, 2002, p. 122), all o...c:..;::: '" '" <.+-.:.e ""d states except New Jersey, North Carolina, and Wisconsin now have U 8. U '" C. RTO stattes (APRO, 2002). These laws spport disclosre, making E: o o > a o -0-0 ""d ::l the actal cost of the RTO agreement apparent, and therefore easier U...c: ""d U U c..> a I-t; o ::c '" or; "2. for consmers to make decisions in their own best interests. For...I:::J ljl OC) C'C.,...,... c... ::l N [--<0... if) Co '-L. example, Illinois stattes reqire that every item of property offered

4 for rental-prchase mst have attached to its front, or displayed as prominently as if attached to its front, a tag disclosing the amont to be paid to acqire ownership (Illinois General Assembly, 1994). Several state stattes reqire less disclosre. For example, only 14 states mandate that any disclosres mst be made on a tag attached to the goods as opposed to disclosres made in the agreement (Martin & Hckins, 1997). When the athors visited RTO stores, personnel were vage abot total costs saying, "It depends on the actal items prchased" and "That's all in the compter - we won't know ntil we print p yor agreement." Responses like these make it difficlt for consmers to make informed choices becase they have incomplete information (Garman, 2002, pp. 6-7). Implications for Consmer Edcators Consmer edcators can help consmers realize the RTO option is jst one prchasing alternative and a very expensive one. They can direct consmers to compare the costs and benefits of sing other choices, i.e., cash prchase, lay-away, installment loans, and credit cards. Lacko et al. (2000) noted that most RTO cstomers have a motor vehicle, enabling them to have transportation to shop for similar merchandise at retail stores; most have experience with saving, obtaining credit, or both. Ifconsmers need a drable good and less expensive alternatives are navailable to them or if consmers perceive that the benefits ofthe RTO contracts jstify the higher costs, these consmers shold be encoraged not to prchase a more expensive item than necessary. Once again, comparison shopping is recommended as the crrent researchers fond prices for similar goods vary among RTO stores. Consmer edcators can alert their stdents and other clientele of the ser friendly resorces available on-line. Several state cooperative extension services have RTO on-line pblications. Their Web addresses follow asp (Arkansas) (Florida) (Illinois) ( Iowa) (Maryland) possible edcational applications of the information presented in this article inclde: Using Table 1 as a gide, condct a srvey of local RTO stores and compare their methods of price disclosre as well as add-on costs, late fees, reinstatement fees, etc. Lead a discssion of how this prchasing option is an exampie 0 f "the poor pay more. " Compare costs ofrban and rral RTO stores; determine if location relates to cost. Condct a srvey of RTO cstomers to determine their satisfaction, merchandise rented, and intentions to prchase merchandise; compare findings to the FTC srvey. Have stdents make presentations in the commnity sing local television and radio stations and news media to make individals aware of RTO strategies. Have stdents design a Web page alerting consmers abot the RTO indstry inclding links to information and government sites. References Anderson, M. & Jackson, R. (200l). A reconsideration of rent-toown. The Jornal of Consmer Affairs, 35, Association of Progressive Rental Organizations (2002). What is RTO? [On-line]. Available:

5 Garman. E. T. (2002). Consmer economic isses in America (7th ed.). Cincinnati: Dame. Hill, R. P., Ramp, D. L., & Silver, L. (1998). The RTO indstry and pricing disclosre tactics. Joma of Pblic Policy and Marketing, 17(1), Lacko, J. M., McKernan, S., & Hastak, M. (2000). Srvey of rent-toown cstomers. Federal Trade Commission Brea of Economics Staff Report [On-line]. Available: gov/ reports/renttoown/renttoownr.pdf Lewis, J., Swagler, R., & Brton, J. (1997). Use of alternative financial services by the poor. The Joma of Consmer Edcation, 15, Martin, S. L., & Hckins, N. W. (1997). Consmer advocates vs. the rent-to-own indstry: Reaching a reasonable accommodation. American Bsiness Law Joma, 34, 385. Mierzwinski, E. (1997). Don't rent-to-own: PIRG's 1997 National rent-to-own srvey (Srvey). Washington, DC: Pblic Interest Research Grop [On-line]. Available: consmer/rtotext.html National Institte for Consmer Edcation. (2001). Smmary of consmer credit laws [On-line]. Available: smmary.cfm PR Newswire. (1999a). Rainbow Rentals adds online ordering, establishing first e-commerce site in rent-to-own market [Online]. Available: _Dec_2/ /print.jhtml PR Newswire. (1999b). Cash technologies signs agreement with Rent-Way to install advanced mlti-fnction ATMs [On-line]. Available: _Sepc21/ /print.jhtml PR Newswire. (2000). Rent-a-Center lanches pay-as-yo-go weekly Internet service [On-line]. Available: findarticles.com/cf-dls/m4prn/2000-april_25/ / print.jhtml Illinois General Assembly (1994). Illinois Rental Prchase Agreement Act, IL. Stat. Ann. 815 ILCS 655 [On-line]. Available: ch815act655.html Virginia Citizen's Consmer Concil and Virginia Poverty Law Center, Inc., (1997). How ww income area consmers pay too mch for too Litde. Unpblished manscript. (Available from the VCCC, P.O. Box 12460, Richmond, VA 23241). Walden, M. L. (1990). The economics of rent-to-own contracts. Jornal of Consmer Affairs, 24(2), Zikmnd-Fisher, B. & Parker, A. (1999). Demand for rent-to-own contracts: A behavioral economic explanation. Joma of Economic Behavior & Organization, 38, Adrianne O. Vidrine is Extension Agent, Family and Consmer Sciences, Loisiana State University Agricltral Center, 157 Cherokee Drive, Crowley, LA 70526; (337) ; avidrine@agctr.ls.ed Frances C. Lawrence is Professor, School of Hman Ecology, Loisiana State University and Loisiana State University Agricltral Center, Baton Roge, LA 70803; (225) ; flawrence@ls.ed ) --J