Rent-to-Own Cars - Complete Guide
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Rent-to-Own Cars - Complete Guide

By Autolist Editorial | February 25, 2021

If you have bad credit or no credit, you may have trouble getting financed for even a used car through a traditional finance company. Rent-to-own companies bridge the gap between those borrowers with blemished credit and the path they can take to own cars.

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 connect with the cars they need, despite their previous payment histories.

What are Rent-to-Own Dealerships?

The rent-to-own dealership mainly focuses on used car inventory. Borrowers who have trouble getting financed through other means can generally visit this type of dealership, make a down payment on a used car they like, and then make monthly payments to the dealership until they pay the amount of the car in full.

This type of rent-to-own program has its advantages and drawbacks, although it is certainly useful to a particular type of borrower with a specific type of financial background.

Your Credit and Financing a Car

When you seek financing for a car, truck, SUV, or another vehicle, the lender checks your credit history with one or more credit bureaus, such as Trans Union, Experian, or Equifax. Based on your credit score, 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.

Problems can arise when car buyers have less-than-perfect or even horrible credit since most lenders are not willing to take the risk of loaning them money to purchase a new car. Some borrowers have limited or no credit, which can affect their chances of approval for auto financing just as much.

Enter the rent-to-own option

With this option, borrowers with damaged or insufficient credit history are able to 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 simply pays the dealership each month (or in some cases, makes bi-weekly payments) to fulfill the obligation of the agreement.

For some borrowers, this seems to be the simple, easy, no-hassle way of buying a car without the need for stellar credit (and in some cases, among the only financing options available to these buyers who are in desperate need of transportation).

Advantages of Rent-to-Own Cars:

As you can imagine, if you are a borrower with subprime credit, rent-to-own arrangements can be a godsend. Some advantages of rent-to-own car sales include:

  • Better chance of approval than most lenders for financed and leased cars. Many rent-to-own dealerships do not even require a credit check. Among those that do, the odds of approving a borrower with bad credit are greater than with a conventional lender.

  • Cheaper than paying car rental fees or using a car service. The money you invest goes toward the balance on your car loan; once it's paid in full, the car is completely yours to keep.

  • Potentially less strict insurance requirements for buyers. Most finance companies require borrowers to maintain a high level of coverage on the vehicles they buy, while many rent-to-own dealerships may be fine with buyers maintaining liability-only coverage.

  • The possibility of finding great vehicles at great prices. While the inventory at such dealerships may be limited, there are generally deals to be had if you find the right dealer and the right type of deal for your particular 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 car free and clear.

Disadvantages of Rent-to-Own Cars:

Like any type of financial arrangement that goes against the norm, there are some drawbacks to taking out a rent-to-own car loan. Some of the key drawbacks are:

  • Poor regulation. Depending on your state, most of the dealerships selling rent-to-own cars have little legal duty to you as the seller of a used car than to offer it "as is." While lemon laws exist, they don't exist everywhere, and their interpretation is broad. 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.

  • Potential to make your credit worse. As mentioned above, if you buy a vehicle that ends up needing extensive repairs and you decide to just let the car dealership take the car back, you may make your credit situation worse than it already is, since 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.

  • Dealerships are often aggressive with late payers. If you finance through a traditional bank, you generally have a 60- to 90-day grace period for late payments. This is generally not 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.

  • Most want a big down payment. While all car dealers look to get some sort of down payment or trade-in, the amount you pay when taking on a rent-to-own car loan is generally more excessive. Even these lenders see borrowers with damaged credit as a huge risk, and they see a higher payment as a fast means to offset that risk. Plan on paying around 1/4 of the total cost of the car you want to buy as a down payment.

  • Less-friendly terms than traditional banks. And finally, 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 higher interest rates, 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 likely be higher than it would be with a traditional lender, which is an important consideration if you are limited in budget.

  • Used-cars only. Unfortunately, rent-to-own operations only sell used cars, so if you have your heart set on a new vehicle from brands like Honda, Nissan, or Toyota, it won't be possible to get one via the rent-to-own method.

  • Warranties may be difficult. Sometimes, rent-to-own vehicles are more difficult to get a warranty for, so be sure to check with the selling dealer on what's available.

Is Rent-to-Own Right For You?

Maybe.

Rent-to-own definitely fills a need in the finance industry for those folks who need a car but have credit problems that negate the purchase.

However, if you can get financing with a traditional lender, you're probably better served going through a local finance company, bank, or credit union. In fact, it can be a good idea to work towards improving your credit to get a more attractive car loan or even saving toward a larger down payment that can improve the odds of receiving traditional financing.

If you do go through a rent-to-own dealership, be aware of the dangers and drawbacks of these transactions listed above and know what you're getting yourself 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 some legwork, you can find a great deal with reasonable terms when you shop for rent-to-own car.