Rent-to-own companies continue to be in the news. Not only about how much they charge their clients for the credit agreement but also because of all the add-ons their products have. Quick Loans Express have a look rent-to-own agreements in depth. We also explore whether the FCA is going to act! Read on to find out more.
The Truth About Rent-to-Own Agreements
In this article, Quick Loans Expres, an payday loan direct lender, look at a typical rent-to-own agreement, a high cost credit option, to see how much they inflate the prices and explain why clients agree to such terms. We then examine one of the hidden costs they often end up paying – the insurance cover. Finally, we describe what the FCA introduced in November 2018 to ensure fairer treatment for the 400,000 people in the UK with outstanding debts on rent-to-own purchases.
How Much Do Rent-to-Own Firms Charge for Their Services?
Rent-to-own firms charge an APR of up to 99.9% over a typical 3-year loan term. This means that customers can end up paying double the retail price of electrical household appliances or furniture. But what does this mean in terms of overall cost?
Let’s take the example of the purchase of an LG 55-inch 4K television. Its price on the High Street is £1,449, but rent-to-own customers would end up paying £2,689. If they chose to take out insurance with the rent-to-own firm and defaulted on one or more of their weekly payments, the final cost of the TV could be considerably higher.
If this is the case, why are rent-to-own credit agreements so popular?
Why Do People Buy from Rent-to-own Companies?
The main reason people buy from such companies is that many have no other choice. Without a nest egg put by for emergencies nor access to mainstream credit facilities, many people go to rent-to-own companies as a last resort. Citizens Advice have pointed out that customers tend to be on a low income, and already struggling with debt. For example, they’re more likely to owe money for priority debts such as energy bills and their Council Tax.
Many rent-to-own customers don’t tend to look at the overall cost of the purchase but instead, concentrate on the weekly cash payments. When they do this, the purchase looks affordable. Often they don’t examine the terms and conditions of the credit agreement. This is probably why so many agree to the add-ons. Let’s look at the example of insurance. Why is insurance cover mandatory for rent-to-own agreements, and how much do rent-to-own firms charge?
Insurance Cover – A Costly Add-On
Rent-to-own products don’t belong to the customer until they’ve paid their final instalment. Initially, they’re renting it from the company. In order to protect their property in case of damage or theft, rent-to-own companies demand that insurance cover is taken out. Although customers can choose an independent stand-alone insurance policy, many find it convenient to pay the rent-to-own firm for their insurance with their weekly cash payments. This makes it more affordable for them. However, the cover is significantly more expensive.
Let’s take the example of the 55-inch TV given above. A stand-alone insurance policy would cost £36 a year whilst the same cover from PerfectHome costs £197 a year, over 5 times more expensive. Even an annual home contents insurance policy is much cheaper, costing an average of £55 a year. Such a policy would cover all valuables in the home worth up to £2,000 and not just the television.
What Do Rent-to-Own Companies Say about Their Add-Ons?
Mike Sweetland, the Chief Executive of PerfectHome said that their employees were open and transparent about additional costs. Employees were trained to ask customers whether they already had home contents insurance, and to check whether their rent-to-own purchase could be included in its cover or whether it would need to be extended. They were also told to emphasise the fact that such insurance was more economical than buying from the rent-to-own company.
A spokesperson for Bright House reiterated their commitment to transparency about all costs in rent-to-own agreements. They also said that one benefit of their insurance cover over others was that their customers weren’t charged ‘excess’ (the financial contribution that they make towards any insurance claim).
The New FCA regulations on Rent-to-own companies?
Since July 2019, the FCA instituted further regulations for the rent to own market to help safeguard vulnrable customers. These are the regulations they introduced to all rent to own products:
- Product prices need to be benchmarked against other retailers
- A total cap of 100% of the price of the product. For example: company can not charge more than £600 on the rent to own for a TV that costs £300.
- Firms are forbidden to increase prices for insurance premiums (e.g theft and accidental damage cover) or arrears charges in order to compensate from lost revenue as a result of the price cap.
Although the FCA recognises the need for change like they did for the quick cash loans industry, they also realise that rent-to-own agreements are the only way for those on a low income to acquire essential household goods. Their intention isn’t to make the measures so extreme that rent-to-own firms abandon the market completely. If that happens, where will the desperate turn to? If it’s unauthorised lenders like loan sharks, the situation could have worse outcomes for rent-to-own customers.
What Changes to Rent-to-Own Agreements are Campaigners Still Demanding?
Consumer protection groups and the media have been vocal in their criticisms of rent-to-own companies. To improve the outcomes for customers, their demands have included:
- Extend the cap to second hand goods so that all potentially expensive purchases are capped.
- Rent to own must benchmark items more often than every 12 months so that they are inline with other retailers.
- Companies should include 5 instead of 3 price of goods in the benchmarking regulations so that prices reflect the real market prices.
- A ban on all commission for sales staff. This is because this encourages them to push sales and possibly mislead customers.
- The default fees to be included in the total credit cap, much like what happens in the payday lending market so that companies are not tempted to practise bad lending or introduce repeat fees.
- The FCA should review the rent-to-own cap after one year to ensure it is working for the consumer.
In their ‘Rent to Return‘ report Citizens Advice estimated that the price cap alone would reduce payments on 245,000 rent-to-own agreements by £62 million.