February 2, 2019

Rent to Own Cars

Bad credit may make it impossible to get a car loan, but it doesn't have to stop you from owning a car. Just like you can rent to own a house, you can do the same with a car. Does it make sense to do so, though?

Rent to own cars may seem like a great idea. You need a little money down and then you make weekly payments towards the ownership of the car. While it sounds like the ideal situation for the consumer with bad credit, there are a few things you'll want to consider first.

How Does a Rent to Own Car Work?

First, let's look at a detailed explanation of how a rent to own car works.

Typically, car dealers offer high-mileage cars that are in good mechanical condition as a rent to own option. Dealers know that they'll make more on the rent to own financing from a consumer than they would selling the car at an auction.

You "rent" the car under the rent to own agreement. You typically make a small down payment and then make weekly payments to the car dealer as you would if you rented the car. At the end of the term, you either own the car outright or you have to buy it by paying the remaining amount due according to your agreement.

What it comes down to is that you rent the car while you make payments. Once the term ends and you satisfy the agreement, you own the car and the dealer transfers the car's title to you.

How Much Does It Cost to Rent to Own a Car?
There's no set fee for a rent to own car. Each company will charge their own fees. Keep in mind, though, that it's not unusual for a dealer to mark up the price of the car by 100% of the price they could get at the auction.

You make a weekly payment according to the agreement. For example, if the agreement is for 3 years, you'd pay 156 weekly payments.

Rent to Own vs Leased Cars

Renting to own a car may sound awfully similar to leasing a car, but it's different. Here's how:

Monthly Payments vs Weekly Payments: When you lease a car, you pay a monthly fee just as you would if you took out a loan to buy the car. With the rent to own program, you make weekly payments like you would if you rented the car.
Ownership of the Car: When you lease a car, you don't own it outright as you would with a rent to own agreement. You may have the option to purchase the car at the end of the lease, but you'll have to have the money to do so.
Credit Matters: When you lease a car, you have to prove that you can afford the payment, which usually starts with a good credit score. In many cases, dealers don't pull your credit for the rent to own program, which makes it easier for consumers with bad credit to get a car.
New Cars: Typically, you lease a new car but when you enter a rent to own agreement, it's on a used car.

Can You Rent to Own a Car with No Down Payment?
Typically, you need a down payment equal to 10% of the price of the car with the rent to own program.

While you can shop around to find a dealer with the lowest down payment requirements, you'll be hard-pressed to find one that doesn't require a down payment. Luckily, the down payment knocks down how much you pay for the rental term, making you a car owner faster.

The Benefits of Rent to Own Cars

Rent to own cars do have their advantages, including:

You won't pay interest: When you buy a car and take out a loan, you pay interest on the money you borrow. This increases the price you pay for the car. You do, however, pay a rental fee, but in some cases, the rental fee can be less than high interest rates.
You don't need to pass a credit check: Many rent to own dealerships don't check your credit. They assume you aren't in a position to purchase a car or you wouldn't want a rent to own agreement. This can make becoming a car owner a faster reality for you.
You have a good chance of owning a car: If you satisfy the rent to own agreement, you could end the process by becoming a car owner. The dealership will turn the title of the car over to you once you make all payments and fully satisfy the agreement.

Can You Rent to Own a Car if You Have Bad Credit?
Typically, dealerships don't pull your credit so you don't have to worry if you have bad credit.

Dealerships usually assume that you have bad credit and that's why you took this route. If you had "average" credit or even "fair" credit, you may still be able to get away with subprime lending, which can be cheaper than the rent to own program.

The Disadvantages of Rent to Own Cars

There are always two sides to every story, so of course there are downsides to the rent to own program:

You'll likely pay a high price: Dealerships are in business to make money, obviously. Since you don't pay interest on a rent to own car, the dealer often marks the price of the car way up so that they make a profit on the transaction.
You make payments every week: You must make your payments weekly and on time. If you miss a payment, you'll typically pay a $25 late fee. It can be cumbersome to deal with 52 payments per year versus the 12 payments on a car loan.
You pay a rental fee: Each dealership charges a different amount for their rental fee. Make sure you pay close attention to the amount you'll pay if you decide to rent to own a car.

Are Rent to Own Cars Better than Subprime Auto Loans?
You shouldn't assume that renting to own a car is better than a subprime loan. In some cases, it may be, but you won't know until you do the calculations.

If you qualify for a subprime loan, calculate the total cost by adding up the monthly payments plus any down payment. Next, compare that to the total cost of the payments (plus the down payment) of the rent to own program.

Sometimes the subprime loan comes out cheaper, even with its excessive interest rates.

Bottom Line

The rent to own program isn't the first program you should consider when you need a car. But it can help you if you don't have the credit to get a car loan. If you do go this route, make sure you understand the terms of the agreement and know the total cost of the car once you complete the agreement.

Write to Kim P at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.