Is a Rent-to-Own Car a Good Option for Those with Bad Credit?

Having bad credit undoubtedly makes life difficult when trying to make major purchases that require a loan. So of course, if you have bad credit and want to purchase a car, you’re probably going to have a difficult time getting approved for standard car financing.

While some prospective car buyers have turned to bad credit auto loans to get the cars they want, others have considered rent-to-own cars as an option if they are having a difficult time securing an affordable auto loan. If you have heard about rent-to-own cars, take time to learn more about them and whether they are something you might consider for yourself.

What is a Rent-to-Own Car?

A rent-to-own car is vehicle that is offered to individuals under a specific agreement that they will pay for a vehicle as they would when renting a car, but instead of turning the vehicle in at the end of the term and losing the money they spent, a portion or all of the money paid for renting it will go toward its purchase.

Here’s an example of how it would work: You find a dealership that offers a rent-to-own program and visit their lot. A car salesman will take you around and help you pick out the car you like. Once you choose the best one for you, you place a down payment and then make rental payments on the car (usually one payment per week).

In addition to the down payment, the criteria for a rent-to-own often include proof of ID, proof of residence and proof of income.

In many cases, the entire amount of your payment will be applied toward the purchase of the car, but it’s important to check with the dealer to make sure this is how they run their program. In all cases, once you’ve made your final payment, the car is yours.

How is Rent-to-Own Different from Leasing?

You may wonder what the difference is between car leasing and rent-to-own since traditional renting requires you to return the car. Here are some major differences between leased and rent-to-own vehicles:

• Ownership: Payments on a leased vehicle are not applied to a purchase and at the end of the term, the vehicle will be given back to the company.
• Credit checks: Leases usually require credit checks, whereas rent-to-own vehicles do not. Also, rent-to-own car payments are often not reported to credit bureaus because you don’t borrow any money before beginning payments.
• Down payments: Rent-to-own vehicles require down payments and leased vehicles do not.
• Vehicle age: When you lease a vehicle, it is usually always new, but rent-to-own cars are usually used since the companies offering the cars are typically not affiliated with franchised new car dealers.
• Car repairs: Leasing a vehicle comes with free repairs, but in most cases, rent-to-own vehicles do not provide the same benefit and require additional warranties to be purchased to cover repairs and towing.
• Incentives: Often, you can take advantage of vehicle incentives when leasing a car because the manufacturer is placing the offer, but since rent-to-own cars are not associated with manufacturers, you’re not likely to catch any deals or discounts.

While there are a number of differences between the two types of car financing, there are a few similarities as well, including that they both usually come with fixed payments, the payment terms are usually somewhere in the 2-3 year range and you can expect to accept some type of dealer financing.

Disadvantages of Rent-to-Own Cars

So let’s say you’ve thought about getting the bad credit auto loan but don’t like the interest rate you’re offered. Then you looking into leasing and decide it’s not for you because you want to own the car. With few options left, you strongly consider a rent-to-own car. Is this really the right choice?

It really depends on the sacrifices you’re prepared to make by taking this route.

Expensive: One of the biggest drawbacks to rent-to-own programs of any kind is that you’ll pay significantly more for the product that it’s actually worth. You might not be paying interest, but the payments you make will add up to a larger sum than the value of your car. The seller has to make a profit somehow.

Frequent Payments: You’ll be making payments more often than the average person who buys or leases a car.

No Effect on Credit: Your payments will probably not be shown on your credit reports, so don’t count on the purchase to help build your credit.

No Warranty: Something else to remember is that since rent-to-own contracts typically don’t include warranties, if you don’t purchase one outside of your contract and your car breaks down soon after you begin making payments (which could happen since the vehicle is likely to be older), you may not have any protection.

If after seriously weighing the pros and cons of rent-to-own vehicles you decide this is the best option, it’s good to investigate the dealership you want to work with to ensure it is a legitimate business. Also, run a check on the car itself to ensure you’re not buying a lemon.

By taking the time to protect yourself under this circumstance, the benefits of buying a rent-to-own car (no credit check, fixed payments, short terms, vehicle ownership) could actually make this type of purchase worth it. However, considering the inflated payments, you might find that renting-to-own is no different that obtaining a sub-prime auto loan with a high interest rate.