Back to GuidesRent-to-own companies bridge the gap between those borrowers with blemished credit and the path they can take to own cars. If you have bad credit or no credit, you may need help financing a used car through a traditional finance company. A rent-to-own dealership functions in much the same way as a buy here pay here car lot, making it much easier for bad credit buyers to get a much-needed car, despite their previous payment delinquencies.
However, there are pitfalls to this way of getting a car, no matter the fine print. Here's a guide to rent-to-own cars and if it's right for you.
What is a Rent-to-Own Dealership?
It's a dealership that primarily focuses on used car inventory and offers financing to pretty much anyone with a social security number, a driver's license, and a pulse. Borrowers who need help getting finance through other means can generally visit this type of dealership, make a down payment on a used car, and then make monthly payments to the dealership until the vehicle's purchase price is paid in full.
While it sounds like a traditional finance, lease, or car subscription plan, it differs because the dealership serves as the lending company, not a third-party company. It's not a bank or automaker's captive finance company like Ally or Hyundai Motor Finance, to name but two.
This type of rent-to-own program has its advantages and drawbacks, but for many, it's the only way to get a newer car, not a Craigslist scam. However, the rent-to-own car buying process can be shady in other ways.
How Credit Comes into Play When Financing a Car
Anytime you try to finance something, the lender checks your credit history with one or more credit bureaus, such as Trans Union, Experian, or Equifax. Based on your credit score (between 300 and 900), the lender determines your creditworthiness and the terms of the car loan you are offered, such as the interest rate, based almost entirely on how well you've performed in the past when paying other lenders.
These days, only some buyers qualify for traditional financing or leasing with anything less than 600, and rates only start becoming favorable with scores of at least 750.
Enter the Rent-to-Own Option
Borrowers with damaged or insufficient credit history can typically enter into a rent-to-own contract, which is, for all intents and purposes, a subprime auto loan. The dealership serves as the lender, and the borrower pays each month (or, in some cases, makes bi-weekly payments) to fulfill the obligation of the agreement.
For some borrowers, this is the simple, easy, no-hassle car buying experience without the need for stellar credit. And in some cases, it's among the only financing options available to these buyers in desperate need of transportation).
Advantages of Rent-to-Own Cars:
Rent-to-own arrangements can be a prayer answered if you're a borrower with subprime credit. Some advantages of rent-to-own car sales include:
There is a better chance of approval than most lenders for financed and leased cars. Many rent-to-own dealerships don't even require a credit check. Among those that do, the odds of approving a borrower with bad credit are better than with a conventional lender.
It's less expensive than paying car rental fees or using a car service. The money you put upfront and pay monthly goes toward the balance on the car loan; once it's paid in full, the car is titled to you.
Most finance companies require borrowers to maintain a high level of insurance coverage on the vehicles they buy, while many rent-to-own dealerships may be fine with buyers maintaining liability-only coverage. Since insurance companies consider credit scores when issuing policies, rent-to-own is another way high-risk buyers are steered toward.
While the inventory at such dealerships may be limited and typically consists of mass-market brands such as Honda, Nissan, and Chevrolet, there are generally deals to be had if you find the right dealer and deal for your situation.
Potential to own the vehicle rather than lease it. Unlike traditional car leasing, where you turn in the car at the end of the lease term and don't own it, rent-to-own provides an avenue to owning the vehicle outright.
Disadvantages of Rent-to-Own Cars:
Like any financial arrangement that goes against the norm, there are some drawbacks to taking out a rent-to-own car loan. Some of the most notable disadvantages are:
Depending on your state, most dealerships selling rent-to-own cars have little legal duty to you as a used car seller than to offer it as-is. While Lemon Laws exist in some states, their interpretation is broad between borders. If you buy a rent-to-own vehicle that tears up the minute you get it home, then you may not have much recourse other than to pay for the car and fix it yourself.
If you buy a vehicle that needs extensive repairs, it's hard to have the dealer admit they knew it had problems and have them take it back and refund your money. You may make your credit situation worse than it already is, because the dealership can report non-payment to the credit bureaus.
Rent-to-own agreements rarely afford the opportunity to improve your credit score. Again, most only report if you mess up, not if you pay as agreed.
If you finance through a traditional bank, you generally have a 60- to 90-day grace period for late payments. That's only sometimes true with rent-to-own companies; if you're one payment late, your car may be put in line for repossession, putting you at risk of forfeiting whatever you've paid on it. Rent-to-own dealerships also have a deserved reputation for intimidation and aggressive tactics when looking for their payments.
Most rent-to-own dealers demand a substantial cash down payment. While all car dealers look to get some down payment or trade-in, the amount you pay on a rent-to-own car loan is generally more excessive. Plan on spending around 25-30% of the total cost of the car you want to buy as a down payment rather than the typical 10-15%.
The terms you'll pay for your rent-to-own car loan are generally less friendly than those of a traditional credit union or bank. Expect to pay much higher interest rates (sometimes as high as a credit card's), more fees, and other costs, and plan on doing it faster than you would otherwise. Most car dealerships handling rent-to-own transactions write loans that must be paid off within 24 to 36 months. This means your payment will be higher than with a traditional lender and a false economy if you're trying to stay within a budget.
Unfortunately, rent-to-own operations only sell used cars, so if you have your heart set on a new vehicle from a brand such as Toyota, getting one through the rent-to-own car program won't be possible. On top of that, they can be abused by previous rental cars or ones that another lender repossessed. That means essential maintenance such as oil changes might not have been carried out, leading to costly repairs that aren't your fault.
Sometimes, getting a third-party warranty for rent-to-own vehicles is more complicated, so check on what's available with the dealer.
Is Rent-to-Own Right For You?
Rent-to-own fills a gap in the finance industry for those who need a car but have credit problems that negate the purchase. However, if you can get financing with a traditional lender, you're far better served through a captive finance company, bank, or credit union. It's an even better idea to improve your credit to get a more attractive car loan or even save toward a larger down payment that can improve the odds of receiving traditional financing.
If you go through a rent-to-own dealership, know the dangers and drawbacks of these transactions listed above and what you're getting into before you sign any paperwork or take ownership of the vehicle.
Many transactions with this type of dealership are flawless and beneficial for both parties, so with caution and lots of research, you can find a deal with reasonable terms when you shop for a used car.
