What is a Vehicle Rent-to-Own Contract?
A vehicle rent-to-own agreement, as the name implies, is a rent-to-own contract for a vehicle. Some old-timers may remember rent-to-own furniture stores. The agreements are essentially the same. A person pays for use of something with the intention of purchasing it, usually as long as they pay for it for a certain period of time. It differs from a lease in that a lease is often accompanied by a balloon payment at the end of the agreement which must be paid for the person to become the owner of the vehicle.
In a rent-to-own agreement, the monthly payments shown in the contract must be sufficient, together with a down payment, to eventually allow the customer to be the owner with no additional payment. However, in practice, we have seen rent-to-own contracts with large balloon payments at the end , as well as "$1 buyouts" which allows the owner to buy their vehicle at the end of the contract for $1.
The amount financed is usually significantly more than the retail value of the vehicle. Often, the interest rate is very high. It is not unusual to see interest rates of 18% or higher.
Lease-to-own contracts were made illegal in Georgia many years ago. In those contracts, the customer leased the vehicle with the contract intending that they would eventually become the owner of the vehicle.
In effect, under these agreements the dealer or financing company has both the purchase money security interest and the mechanics lien for repair work. If the customer does not pay the rent-to-own monthly payments or has the vehicle repaired, repossession is a dream.
Advantages and Disadvantages of Rent-to-Own Vehicles
As with any financial decision, renting to own your vehicle has its benefits and drawbacks. Before you opt for this route, consider both sides.
Pros to Rent-To-Own
First and foremost, you have flexibility. If you decide to purchase your vehicle outright, you’re free to do so at the end of the term. You won’t need to finance through a dealer or bank. You can also choose to walk away from your lease agreement and return the vehicle in its current condition. Your total investment will remain low.
Another positive aspect is your ability to test-drive a car over an extended period. For virtually no cost, you can determine if this is truly the vehicle for you. Every driver wants a reliable car that delivers in every way. When you rent to own, you can make sure this car meets your expectations.
Finally, you’re able to customize your payments and even the length of your contract. You have options that aren’t available with traditional dealerships, and this flexibility makes a big difference.
Cons of Renting-to-own
The biggest consideration when renting to own a vehicle is the final cost. Hidden fees can be applied whenever you return or purchase your vehicle late in the game. Depending on the dealership, these fees can be devastating to your budget. Beware hidden fees and other issues linked to buying a vehicle at the end of your agreement; it helps to request a full list upfront.
You’re also responsible for all maintenance and repair costs. Your vehicle will have to be in like-new condition when you are ready to own it; otherwise, you could be charged hefty fees. While it’s true you only pay for any regular maintenance, the payoff is a car in good shape. If you don’t keep up with maintenance and repairs, you will be responsible for paying for fixes before the end of your lease.
Essential Conditions in a Vehicle Rent-to-Own Agreement
When entering into a vehicle rent-to-own agreement with a local car dealer, as with any contract it is crucial to know the terms and conditions of the agreement. Some of the most critical terms and conditions to look for in a vehicle rent-to-own agreement include the following:
Payment Schedule
As with all contracts, look carefully at how often payments are due and whether there are any payment grace periods. In addition, fining or penalties for late or missed payments need to be clear.
Interest Rates
As the name suggests, a rent-to-own contract charges interest on top of the vehicle loan payment. Be sure to clearly understand any interest that is charged on the loan and how the payments will stack up over time with the interest included.
End-of-Term Options
It is also important to make sure you know your options when the term of the vehicle rent-to-own agreement is over. Pay careful attention to any balloon payments, other payments owed, sales tax amounts, and options for full or early pay-off of the contract.
Legal Protections Under Vehicle Rent-to-Own Contracts
Buyer beware is the traditional adage when you are purchasing a vehicle and are confident that you don’t require an expert to inspect it, especially if you are making the purchase as a ‘used vehicle’ at a more attractive price point. However, it is not as simple of a case in rent-to-own arrangements in which the Seller (or Lessor) retains title over the vehicle or sometimes just the number plates, whilst you make your rental payments and are the registered owner. There are legal protections in place for you as the buyer however, and hopefully you will never need them and your purchase will be as smooth as possible. It is comforting to know that you have some leverage should anything go wrong with the vehicle, for example , if there is an undisclosed defect or a heavy crash following your purchase.
Most states have enacted legislation providing consumer protection in rent-to-own transactions. The Federal Government calls these provisions ‘Consumer Leasing Act’. State laws can vary widely, but they generally include many of the same basic provisions such as:
• Missing Mechanic’s Lien
• Disclosure of all transaction terms including the rent-to-own agreement
• Protection in the event of default
• Cancellation & prepayment rights
• Protection from negative reporting made to credit agencies for defaults
• Customer Service Hotline for concerns with a transaction
As the Buyer of a rent-to-own vehicle, each state has enacted consumer protection laws to provide you with adequate protection against bad faith Sellers/lessors. You may be able to take legal action against the Seller/lessor, and you may be eligible for damages under your respective state laws – under the Consumer Leasing Act.
Preparation for Signing a Vehicle Rent-to-Own Agreement
Before purchasing a vehicle from a rent-to-own dealer, a potential buyer should follow steps that include but are not limited to: investigating the automobile dealer registry to locate registered rent-to-own dealers in his/her area; inspecting the vehicles available for rent-to-buy; and reviewing and asking about the terms of the agreement and the interest rate.
If the buyer is interested in a particular vehicle, he/she can go online or visit a rental dealer to apply for credit or obtain an estimate on the value of the vehicle. While it may be possible to negotiate the sales price, the final decision is up to the dealer.
There is also a U.S. Department of Housing and Urban Development checklist available that tells a consumer what questions to ask when deciding to buy or rent-to-own a vehicle. This is a good way to arm both the negotiation and selection process with facts.
The consumer is wise to investigate other financing options, including charging the sale to a credit card of highest interest, if the buyer is confident of being able to repay the total sale price within the same timeframe as the rent-to-own schedule. Being able to read the fine print is important in understanding all details of a car purchase, so be sure and read the entire agreement before signing.
Options Other Than Rent-to-Own
Because rent-to-own arrangements are often predatory and expensive, consumers should consider other options. One obvious option is to buy or lease a lower-priced vehicle, but there are other options worth considering as well.
When leasing a vehicle, you pay only the depreciation on the vehicle during the lease term, plus rent and sales tax. But, in addition to monthly rent, lessees will have to pay for garagekeepers insurance (which covers your liability for damage to the vehicle and for any theft of the vehicle, but not for personal injury or property damage to others), maintenance and repair (most leases contain maintenance and repair obligations), excess mileage, and a disposition fee when you turn in the vehicle at the end of the lease. Leaseholders also typically have to pay significant up-front fees.
When shopping for a lease, consumers should compare the cost of leasing to the cost of buying a new or used vehicle. The advantage of leasing is having lower monthly payments, but depending on your credit rating and the loan terms, you may not save all that much by leasing. If you lease several vehicles in a row, your monthly payments could be more than you would have paid if you had bought each vehicle . Leasing can also limit your ability to obtain certain tax benefits. If you are self-employed, for example, you may not be able to deduct the full amount of your lease payments as a business expense. Some companies are able to depreciate leased vehicles and receive a tax benefit that way.
As an alternative to leasing, you can choose to purchase a new car or truck. Even if you finance the purchase, the monthly payments could be less than a lease payment. If you plan to keep the vehicle for the long term, buying is probably the right choice.
Buying used is an attractive option if you have long commutes, because your mileage will be much lower than with a new vehicle. The lower cost of a used vehicle usually results in smaller monthly payments, and the $300-per-month lease cap disappears from your budget. Several states have no limits on dealer markups; other states limit the amount that can be charged, but some states impose no limits on a dealer’s markup for used vehicles sold for more than a certain amount. In these states, you may want to buy a used vehicle from a private party.