Having bad credit undoubtedly makes life difficult when trying to make major purchases that require a loan. And if you have bad credit, getting approved for a standard auto loan might be an even bigger hurdle.
Although some prospective car buyers have turned to bad-credit auto loans to get the vehicles they want, others have considered rent-to-own cars as an option if they are struggling to pay auto loans.
What Is a Rent-to-Own Car?
A rent-to-own car is a vehicle that is offered to individuals under a specific agreement: You pay for the vehicle like you would when you’re renting a car, but instead of turning the vehicle in at the end of the term and losing the money you spent, a portion or all of the money goes toward the car purchase. Here’s an example of how it works:
Amy’s credit score is 540. After deciding on a rent-to-own car priced at $10,000, she made a down payment of $1,500.
- Amy pays $80 weekly ($320 per month) and she’ll own the car after 156 weeks (three years) of payments
- That means that she’ll pay $12,480 ($80 x 156) in weekly payments
- The total cost of her rent-to-own car would be $13,980 ($12,480 + $1,500 down payment)
Your weekly payment includes the fee you’re paying to rent the car and payment toward buying the car. Make sure you know the terms of your rent-to-own car’s payment distribution and whether more money is due at the end of the rental term in order to buy the car.
Rent-to-Own vs. Rental Car Sales
Don’t confuse rent-to-own cars with some car rental companies’ rent-to-own programs. For example, the Hertz Rent2Buy rental car sales program promotes Hertz car sales by enabling customers to rent a vehicle they think they want to drive and test it out for three days. If you buy the vehicle, your rental fees go toward the purchase price.
To secure a rent-to-own vehicle, you must make a down payment and then make payments on the car, usually one payment per week or every two weeks. In addition to the down payment, the criteria for a rent-to-own application usually includes proof of ID, proof of residence and proof of income.
Rent-to-Own vs. Leased Cars
The biggest difference between car leasing and renting is that at the end of the rent-to-own contract you will own the car. At the end of a lease contract, you do not own the car. Think of leasing like a rental with the option to buy.
This table breaks down the main differences between rent-to-own cars and leased cars:
|Rent-to-Own Cars vs. Leased Cars|
|Consideration||Rent-to-Own Cars||Leased Cars|
|Ownership||At end of rental term (usually 12-36 months), you own the vehicle.||Payments are not applied to a purchase. At term end, vehicle is given back to the company.|
|Credit Checks||Usually not required. Payments are often not reported to credit bureaus.||Usually required|
|Down Payments||Required||Little to none required|
|Payment Frequency||Weekly or biweekly||Monthly|
|Payment Distribution||Weekly or biweekly payment divided between rental fee and payment toward buying car||Monthly payments go towards lease of car|
|Vehicle Age||Usually used||Usually new|
|Car Repairs||Not included. Repairs and towing require the purchase of additional warranties||Free repairs|
|Warranty||Usually not included||Included|
|Incentives||Usually not offered||Usually offered|
|Early Termination||Down payment is usually forfeited||Fees and penalties might apply|
Make your payments on time, because if you miss just one, it might result in the dealer canceling the purchase portion of the agreement. Additionally, you might lose the payments you already made.
See Also: Best Loans for People With Poor Credit
Pros and Cons of Rent-to-Own Cars
Like most financial moves, going with a rent-to-own vehicle has its benefits and drawbacks. To decide whether you should try to take out a car loan or explore rent-to-own cars, you need to weigh the pros and cons. Take a look at each for this type of program to see if it’s the right choice for you.
Pros of Rent-to-Own Cars:
- There’s no credit check. Compared with a contract to buy or lease a car, rent-to-own car contracts are easy to get. Having a policy that’s so light on requirements makes the rent-to-own option a highly viable one.
- There’s no interest. Because you are not being loaned money for the car unless you use dealer financing, you do not have to pay interest. What you are paying each week is the rental fee and the money toward the purchase of the car.
- There’s no effect on credit. If you are late on a payment, you will be penalized with a late fee, usually $25 — but your credit will not be affected. If you are using dealer financing, however, your credit might be affected.
Cons of Rent-to-Own Cars:
- It’s 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.
- It requires frequent payments. You’ll be making payments more often than the average person who buys or leases a car.
- It doesn’t include a car warranty. 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, you might not have any protection.
Review your contract for terms regarding early termination. This can be critical if the car ends up needing a lot of repairs. You might decide a few months or a year into your purchase that you want to end the rental. Under the terms of your contract, it is likely you will lose your down payment and any money you paid for the purchase of the car if you do this.
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It’s a smart idea 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 could actually make this type of purchase worth it.
Barri Segal contributed to the reporting for this article.