Lease-to-own stores, or progressive leasing stores, are stores where individuals can lease furniture, appliances, electronics, and other personal items for a specific amount of time with a purchase option at the end of the term. This form of credit may appear desirable if you require an item and cannot afford to buy it outright or obtain credit in the usual manner. However, is it indeed an effective method to improve credit? Alright, let’s delve deeper into our subject matter.
How Rent-to-Own Arrangements Work?
Rent to own means the consumer gets to take home the product instantly but will pay off the balance on an installment basis weekly or monthly for a duration of 12 to 24 months. This is in line with the notion that a consumer does not own an item until he or she pays the final balance on it. Then, they may repossess the merchandise while the consumer is left without a refund for any amount of money they paid but without the product.
Thus, by the end of the agreement term, you will have spent more money on the store than the amount of cash needed to purchase the item. Why? Since rent-to-own stores ask for higher prices as they allow you the convenience of paying for items in installments rather than in full. The extra sum is akin to interest you would pay on an installment loan or credit card, which is added to the cost of the item rather than paid separately.
For instance, if you need a laptop and the cost of purchasing it directly is $700, then, you may be charged $25 for a weekly lease of the laptop for 104 weeks which is equivalent to 24 months and the total cost will be $2,600. That means that you would spend an amount of money $1,900 more than the cost of the item at a retail store when you finally own the item.
The Benefits of Rent-to-Own
Despite the high costs, rent-to-own arrangements do offer some benefits:
- Real-time access to stock up on goods that you require but for various reasons cannot purchase at the moment
- No credit check or financing approval process is necessary because payment plans are fully adjustable.
- Preliminary buying choices because you can acquire the object without much delay as well as perhaps, purchase it at a lower price.
- Delivery and installation: free transportation services, installation services, repair services, and replacement services of merchandise that are leased.
The biggest disadvantage apart from the relatively high cost is that rent to own does not build credit unless the lease company reporting your payments does so. More on that next.
To answer the question of whether rent-to-own payments help build credit, it needs to be defined first.
Some stores claim that through rent-to-own, people can build credit, while others do not agree with this claim. The fact is that most rent-to-own firms do not share your payment data with the three major credit bureaus (Equifax, Experian, and Transunion). Leasing with them therefore gives one household items the right way but does not even contribute to one’s credit history.
However, a few national rent-to-own chains now share information about your timely payment to one or more credit reporting companies. They include:
- Aaron's
- Acima Leasing
- Flexshopper
- Genesis Credit
- Progressive Leasing
This way, you maintain a good payment record based on the stipulations provided in your lease agreement which in the long run can be useful in constructing credit. As long as you double-check to ensure the store location you are using provides data to at least one of them, it should be fine. While reporting such incidents, some franchise store owners fail to do so even when the national chain usually reports such incidents.
Strategies for Establishing Credit when Employing Rent-to-Own Arrangements
However, if you need to lease merchandise and accrue credit at the same time, try to make rent-to-own occasional and not the norm. Why? This means that while renting to own is comparatively cheaper than other shopping methods, it is still very costly in the long run because prices are inflated. Here are tips to get some credit benefits without overspending:
1. Verify reporting: Check that your store reports to credit bureaus before signing the lease.
2. Start small: This option involves leasing an item that is cheaper than the total cost of the product for 6-12 months. A shorter term means a lower interest and it proves that one is capable of handling payments.
3. Pay on time: Each payment is significant! The credit score is comprised of 35% payment history, 30% outstanding balances, 15% of the length of credit history, 10% of credit mix, and 10% of new credit.
4. Track your credit: This means that one should get copies of their credit reports so that they can track the improvement that is being made.
5. Graduate to other credit: After 6 to 12 months of paying on time and proving stability with rent-to-own payment, opt for a secured credit card or “second-chance” credit card to establish more credit with lower interest rates.
There are many ways to build credit but the most effective methods are listed below:
The best way of building up the scores is by handling credit responsibility over time. If you can't qualify for traditional credit yet, consider alternatives like these:
- Secured credit cards: These need a refundable security deposit and the three major bureaus pull credit reports.
- Credit-builder loans: Available in some credit unions and consumer financial firms. People pay monthly installments which are usually smaller than the amount they borrow, and in the end, they get the money.
- Store credit cards: Store cards, especially department cards, require low credit scores but come with expensive penalty APRs; therefore, avoid carrying balances and pay in full every month.
- Become an authorized user: This can be done by convincing any of your friends or a close family member with a good credit score to include you in any of the currently active accounts.
- Fingerhut: This catalog retailer has merchandise on installment and has an account reporting policy to credit reporting bureaus.
The Bottom Line
Renting can be done by engaging in rent-to-own companies for appliances, electronics, and furniture to create an on-time payment record to bureaus and over time improve credit scores. However, it is a very expensive method to cultivate credit given the exorbitant prices charged by service providers. Where credit rejuvenation is desired in a short time and at a lesser cost, products such as secured cards and credit-builder loans are comparatively more effective.
