Buying household items, like cookers, televisions and freezers, can be very expensive, particularly if you have to buy an emergency replacement. This is why it’s tempting to buy through companies allowing you to pay for these products in instalments. This is known as Rent to Own (RTO) and while it can seem like a good deal, high interest rates mean you end up paying far more than the item is actually worth.
- What does the FCA announcement say?
- What is Rent to Own?
- What happens at the end of a Rent to Own agreement?
- What if I already have a Rent to Own agreement?
- What if I’m thinking about starting a Rent to Own agreement?
- Alternative ways to pay for purchases
- Using other forms of credit
- If you’re claiming benefits
- Local welfare assistance
- How to avoid high-cost credit
- Avoid loan sharks
What does the FCA announcement say?
A price cap on the Rent to Own (RTO) market could be introduced from April 2019, according to the Financial Conduct Authority (FCA). This would put a limit on the amount of interest customers can be charged.
Currently, there is no cap and consumers can end up paying up to four times the average retail price, once add-ons such as insurance and extended warranties are taken into account.
The FCA’s proposed plan would mean customers could not be charged more than the cost of the product in interest charges. The level of the cap is subject to a consultation which will be open until early 2019.
RTO companies would also not be able to charge more than the average price of three mainstream retailers for the products.
From 22 February 2019, the sale of extended warranties will be banned at the point of sale.
What is Rent to Own?
Rent to Own (RTO) is a payment system most commonly used for household goods, such as fridges, washing machines and televisions. Companies offering this service include BrightHouse, Perfect Home and Buy As You View, but there are many others.
You get the product straight away and pay for it in weekly, fortnightly or monthly instalments, plus interest, typically over one to three years. These agreements often include insurance or warranty policies for the item.
The interest you will be charged varies, but many companies charge around 70% APR (annual percentage rate). This means you can end up paying substantially more than the item is worth over the course of the agreement.
What happens at the end of a Rent to Own agreement?
Depending on the terms and conditions you agreed to and the company you’re dealing with you might:
- own the item outright
- be given the option to purchase the item for an additional charge
- end the contract and return the product
- switch or upgrade the product, by taking out a new credit agreement.
What if I already have a Rent to Own agreement?
For the moment, nothing is likely to change and you will be required to continue to make your standard repayments. Any insurance or warranty included in the agreement is also unlikely to be affected for the time being.
You do have at least a 14-day cooling off period, so if you’re in the first two weeks of your arrangement, you can cancel it. The cooling-off period runs from the day the agreement is concluded, or from when you receive a copy of the agreement.
Depending on the terms and conditions, you might also be given the option to send the product back during the course of the agreement, but this might involve paying an additional fee.
What if I’m thinking about starting a Rent to Own agreement?
If you’re thinking about taking out a Rent to Own (RTO) agreement, you might want to consider holding off until the cap comes into place.
This is because you’re likely to get a much better deal in April 2019. If you take out an agreement before April 2019, you will be held to the terms of the contract you signed up to.
If your purchase is urgent and cannot wait, then we outline some alternative ways to pay for purchases below.
Alternative ways to pay for purchases
Rent to Own can be a very expensive way to pay for larger household purchases and it’s worth looking at the alternatives.
Cut back or save up
See if there is any way you can cut back on other household expenses to find the money you need.
If what you need to buy isn’t urgent, then see if you can save up the money first. It might take a while, but it will cost you less than borrowing the money.
Authorised overdraft
If you need to replace something urgently, you might be able to use an authorised overdraft, but make sure it’s authorised or included in your interest-free overdraft limit. You will have to pay significant fees if you go into an unauthorised overdraft.
Using other forms of credit
If saving up for a purchase is not an option, there are several ways to borrow money at a lower interest rate than Rent to Own agreements.
But before you make a decision make sure you know:
- exactly how much it will cost
- whether you can afford the repayments.
Personal loans
Personal loans can offer good rates of interest, depending on your credit score. However, you might end up borrowing more than you need as most lenders will not offer loans of less than £1,000, which might be more than the amount you need for a household purchase.
Credit cards
Credit cards are another option, but you need to be sure you can make more than the minimum repayment each month. If you can’t afford to make significant repayments, borrowing on a credit card can be very expensive.
Credit unions
Loans from credit unions are much cheaper than from other lenders and you can pay the money back at a rate you can afford.
Responsible Finance
If you’ve been turned down for credit by high street lenders, then you can look at fair finance providers. Their interest rates are lower than high-cost credit providers but higher than a credit union. Repayments are based on an affordability assessment which ensures the borrower can keep up with the repayments.
Pawnbrokers
Pawnbrokers are another option where you leave something valuable, such as jewellery, as security for a loan. The rate of interest you will be charged is normally lower than a high street bank and it’s unlikely you will get the full value of the item, but you will get a quick decision.
Borrowing from friends and family
Borrowing from friends or family might be an option which helps you avoid the risks of high-cost borrowing. Make sure you and the person you’re borrowing from:
- work out an affordable repayment plan
- discuss what will happen if you’re late or cannot afford to repayments
- put your agreement in writing.
If you’re claiming benefits
If you’re on certain income-related benefits, including:
- Income Support
- income-related Employment and Support Allowance
- income-based Jobseeker’s Allowance
- Pension Credit
- Universal Credit.
you might be able to apply for a Budgeting Loan (or Budgeting Advance if you’re on Universal Credit) to cover the cost of:
- furniture
- baby items (such as cot or pram)
- household appliances (such as cooker or fridge)
- clothing or footwear
- work clothes or tools
- travelling expenses
- childcare costs to cover training courses.
Local welfare assistance
If you’re struggling to pay for an essential household item like a cooker, fridge or washing machine and you are getting certain benefits you might be able to find one through your local council’s welfare assistance scheme.
Some local authorities might also give loans to help you buy what you need:
- If you live in England, find your local welfare assistance team using this interactive map on the Children’s Society website.
- If you live in Scotland, find out more about the Scottish Welfare Fund on the Scottish Government website.
- If you live in Wales, find out about the Discretionary Assistance Fund for Wales.
- If you live in Northern Ireland you might be eligible for Finance Support. Find out more on the nidirect website.
How to avoid high-cost credit
If you can’t take out a rent to own agreement and you would find it difficult to use the mainstream credit options, like an overdraft, personal loan or credit card you might be tempted by other kinds of high-cost borrowing like payday loans or doorstep lenders.
These forms of credit can work out to be very expensive and you need to think very carefully before you decide to borrow in this way. Before you make a decision read our guides.
Avoid loan sharks
Loan sharks are illegal lenders who often target people who are desperate and who can’t get mainstream credit. They might seem friendly at first but borrowing from them is never a good idea – even if you feel you have no other options.
This article is provided by the Money Advice Service.
