The Pros And Cons Of Rent-To-Own Cars Explained

It's funny how our needs and our finances aren't always on the same schedule. Perhaps "tragic" is a better word. Take the need for a car. Maybe the faithful old jalopy we were driving just died a noble death, and now we're without a way to get to work or pick up the kids. Plus, we've hit hard times, missed a few bills, and now our credit is in the toilet. Or maybe we need a car and we're just starting out as an adult with little to no credit history. Either way, getting a car loan or approval for a lease may be next to impossible, and we could end up dealing with shady lenders. 

Then we see an ad from a car dealership that offers "rent-to-own" cars. No credit? Bad credit? No problem! Maybe the ad claims there's no down payment or interest, and the payments are low. It sounds exactly like what we need.

Still, is renting a car to own all it's cracked up to be? It's true that there's no interest and payments are low. But the markup is usually really high, and those payments are weekly or biweekly, not monthly. In total, you will have paid more to rent to own a car than you would have with an auto loan. On the other hand, it's much easier to get approved for a rent-to-own program. But it's also much easier for the car to get repossessed. And completing the program doesn't help your credit.

Once upon a time, having bad credit was a cause for shame: It seemed to say you were irresponsible. But with increasing layoffs and the ever-rising cost of living, less-than-stellar credit is an unfortunate reality for lots of people. In fact, record numbers of Americans are behind on their auto loans. That means some folks find themselves in a situation where they need a car but can't get a decent loan. Rent-to-own dealerships don't check your credit, but often only ask for proof of income. That's because the program is designed for customers with poor or bad credit, so it's easier to get approved.

Down payments are generally lower on rent-to-own cars than with auto loans. There are upfront costs, but these may be lower than with a traditional auto loan. You'll want to check the terms to make sure. There are also no formal interest charges. Interest can be a bear for folks with poor credit, as they are usually charged much higher rates than customers with good credit. We recommend using an online tool to find out what your interest and payments would be on a traditional loan with your credit score, and comparing it to the terms of the rental agreement.

Finally, it takes less time to own the car when you rent to own. Rental agreements are generally just one to three years, after which you own the vehicle. To compare, the average auto loan is over five years and seven-year car loans are becoming normal, though you can get shorter terms.

We're not sure we have the space here to list all of the cons of renting to own a vehicle versus taking out a traditional auto loan. First, in spite of the advertised low payments, you generally pay a lot more for a car you've rented to own than one you've bought outright. It's true that there's no interest charged on a rent-to-own vehicle, but the markup on the dealer's cost is generally much higher. The dealership also adds fees on rent-to-own agreements, hiking the cost. Basically, dealerships are taking a bigger risk on these agreements, and they have to make their money somehow.

But there's plenty of risk to go around on a rent-to-own contract. These cars are usually high-mileage used cars, not under warranty and provided as-is. What if the car turns out to be a clunker? Some agreements let you back out before the end, but you'll have to pay an early-termination fee. In the meantime, you're on the hook no matter what goes wrong with the car, even though you don't own it until the agreement ends.

That's another disadvantage of renting to own a car instead of using an auto loan: You own no equity until the end of the rental period. Drivers who take out a traditional loan can sell the car or trade it in before they pay it off. Not so with a rent-to-own arrangement. You're not even allowed in most cases to tint the windows, make other modifications, or use the car for Uber.

You might be starting to think that renting to own a car sounds a lot like leasing one. After all, you don't own the leased car while you're making payments, either. That's true, but probably the biggest advantage of rent-to-own is that you do actually own it once you're agreement is done. That's not the case with a lease. If you want to own the car you've been leasing, you'll have to buy it. Sometimes you can get good a deal on the buyout price, but generally you'll have to take out a loan to make the purchase.

Another advantage of renting to own a car over leasing it is that there are no limitations on mileage. Dealerships limit the number of miles you can put on a leased car. Exceed that figure, and you'll be charged more money. It's the same if, at the end of your leasing agreement, the dealership decides there's more wear and tear on the vehicle than there should be. You'll be charged for that, as well. But dealerships don't care what condition your car is in at the end of a rent-to-own agreement, as long as you've made all of your payments. They got their money, and the car is now solely your problem.

And then there's the credit check. Generally, dealerships run your credit before leasing a car to you. This can be a barrier to entry for folks with poor or bad credit.

There are definite disadvantages to renting a car to own as opposed to leasing one. As we mentioned, rent-to-own cars are usually high-mileage used cars, and they don't come with any kind of warranty. And dealerships offer a limited selection, generally speaking, of cars available for rent-to-own. Leased cars, on the other hand, are new or late-model and come with the manufacturer's warranty. Used cars come with repair bills and increased maintenance costs. 

This is an issue, because most rental contracts say the dealer can repossess your vehicle as soon as you miss one or more of your weekly or biweekly payments (there's a longer process for repossession in the cases of leases and auto loans). You could have invested hundreds or thousands of dollars in repairs, but miss one payment, the car is gone and you get none of your money back. That also means you'll want to think long and hard about whether you can realistically meet the commitment of making payments every week, as opposed to once a month, like with a lease.

Another disadvantage of rent-to-own arrangements is that they do nothing for your credit score. It's different with auto loans or even leases. Completing either of those can improve your credit score. But making all of your payments on time during a rent-to-own contract? Nada.

It's not easy to climb out of a financial hole. The more broke you are, the harder the world makes it to dig your way out. Late fees, hidden fees, and high interest rates (or effective interest, in the case of rent-to-own cars) make it expensive to be poor. Rent-to-own arrangements for buying cars are no exception. You'll end up paying more for a car when renting to own it than you would if you took out a traditional loan.

Does that mean nobody should rent to own? The harsh reality of being in a financial bind is that sometimes you do what you must to get by. And that describes more and more people in today's economy. You might need a car right now just to get to work, but you've been late on a few bills and can't wait for your credit to be rebuilt. Rent-to-own could be a solution, if less than ideal.

If you do go the rent-to-own route, be careful. Plenty of businesses are more than happy to help people who are broke make bad financial decisions (we're looking at you, payday loan companies). So make sure you know up front what all the fees and any balloon payments are going to be before you sign the rental agreement. Compare the price of the car with its market value and check it out thoroughly before renting to own. And look at this as a temporary solution, not a lifestyle choice.