Pros and cons of rent-to-own cars

Cars are a necessity for some but buying one outright can put a major dent in the budget. A car loan is one option but if you're not in a position to take on additional debt, you may want to consider the rent-to-own option.

This can provide an alternative pathway to car ownership, but it's not without its pitfalls. Read on to determine whether rent-to-buy could work for you.

How do rent-to-own car schemes work?

A rent-to-own car works in much the same way a normal rental arrangement does. You sign a contract and make weekly payments for the use of a vehicle. But rent-to-buy contracts are different - they come with a clause that at the end of the rental period (generally three years), you will buy the car. As such, your weekly rental payments not only cover your use of the car but also contribute to the eventual purchase of the vehicle.

This means at the end of the lease term when you've made your final payment, ownership of the car will be signed over to you. Depending on your agreement, you may be required to make a down payment at the start of the contract or a lump sum at the contract's end.

Let's use an oversimplified case study to demonstrate a real-world application:

Brent T. Owen has accepted a new job two hours away from his home, but he doesn't have a car and there's no public transport to the area. He doesn't have the necessary credit score to be approved for a car loan, so he decides to enter into a rent-to-own car agreement.

The car's market value is $14,000 and he makes a $2,000 down payment, with the agreement to purchase the car after three years, making weekly repayments of $90 and a final lump sum payment of $2,000.

That means the total cost of Brent's rent-to-own car would be $14,040 (weekly repayments) plus the $2,000 down payment and $2,000 end payment, which comes to $18,040.

Brent will end up paying more than the car is worth (as you also do with a car loan), but he has the use of the vehicle when he needs it, and his rental payments go towards his purchase.

Pros and cons of rent-to-own cars

Although rent-to-own-cars may seem like a straightforward and viable option, they can work out to be far more expensive than other avenues of car ownership.

It all comes down to the agreement you enter into. It goes without saying you should carefully read the terms and conditions to fully understand what you're getting into.

That said, let's check the pros and cons of rent-to-buy schemes to see if they could work for you.

Pros

• No interest: Arguably a rent-to-own car's greatest drawcard is the fact you are not paying interest because there is no money being loaned. Your weekly repayments include the cost of renting the car and repayments on the eventual purchase. Interest costs can easily rack up into the thousands (especially if your credit score prevents you from getting a good interest rate) so avoiding this may save you some money.

• Fewer credit checks: It's relatively easy to get a rent-to-own car (so much so that you could almost put this on the cons list). Providers who run credit checks likely won't vet people as rigorously as a lender would and are often willing to rent to people with sub-par credit scores. Some providers may not run checks at all. This makes it easier for people who have had a bad run with their finances to get a car. That said, you should only access a rent-to-own scheme if you are financially stable, regardless of whether they will let you rent or not.

• Repair and build your credit: Many people fear that once they have a bad credit score, there's little they can do to repair it, but this isn't the case. Making your payments on time over the course of your rent-to-own contract can boost your credit score, which is good news for those who entered into such agreements because they had a bad credit score in the first place. Of course, the opposite is also true, in that if you don't make timely repayments, your credit score will suffer.

• Fixed, all-inclusive repayments: Rent-to-own cars are typically a very convenient arrangement as the repayments won't fluctuate as a variable-rate car loan might. They may also include the rental fee, car repayments, and often registration and insurance costs given the fact the rental company still owns the car. This convenience, coupled with fixed payments, can help with budgeting and financial planning.

Cons

• Cost: Rent-to-own cars are expensive. Even though you're not paying interest, the weekly repayments typically work out to be more than if you were repaying a car loan. This - coupled with contracts often requiring a down or end payment (sometimes both) - means you'll pay far more for the car than if you bought it outright or through a loan. In addition, there are a multitude of fees unique to rent-to-own contracts which can be very pricey. These include late payment fees, direct debit fees, account keeping fees, and termination fees for breaking the agreement or paying the car off early.

See also: The most common car loan fees and charges

• More frequent repayments: Banks and other financial institutions will typically require monthly repayments on loans, and some offer the flexibility of borrowers choosing their own repayment schedules. A rent-to-own agreement generally requires weekly repayments which may present cash flow issues for some people.

• You don't own the car: Well, eventually you do, when the contract ends and you make the final payment, but for the usual three-year rental period, the car belongs to the company you've rented it from. This means you can't make any modifications to the vehicle or classify it as your own asset for financial purposes.

Rent-to-own vs car loan

People often look to rent-to-own cars as an alternative to taking out a car loan. This is often because rent-to-buy deals are relatively simple to sign up for in comparison to the process of applying for a car loan.

But car loans will almost always be cheaper than a rent-to-own car, even though you're paying interest.

Car loans may also not have the fees and frequent repayment schedule that rent-to-own deals demand, while you're free to make modifications to a car that still has a loan against it.

Even if you have an average credit score, it's wise to compare the cost of taking out a car loan with a rent-to-own scheme. Below are some of the lowest interest rate car loans on the market to get you started:

Important Information and Comparison Rate Warning

What other options are there?

There are other options outside of a rent-to-own car and taking out a car loan, including:

Leasing

A car lease is quite similar to a rent-to-own agreement. First up, you pay for the use of a car for a set period of time, typically between two to five years, and at the end of the agreement, you can either choose to extend the lease, buy, or trade-in the car and lease another one. Unlike rent-to-own cars, which are primarily for personal use, leases can be taken out for personal and business purposes. There are three types of car leases: novated leases, finance leases, and operating leases. Check out our full article on the pros and cons of car leases.

The main difference between car leases and rent-to-own cars is flexibility. Entering into a rent-to-own contract means you are legally obligated to purchase the car at the end of the agreement, whereas car leases afford you several different options. Additionally, car lease payments are typically cheaper than rent-to-own payments as you're not making repayments on the car, just for its use.

Novated leases

A novated lease is an agreement between you, your employer, and a finance provider. Essentially, if you're an employee, you can enter into a lease agreement for a car with a finance provider. You can then 'novate' your lease (or make a new contract) with your employer who agrees to make the payments on your behalf from your pre-tax salary. This is a form of salary packaging that effectively reduces your taxable income. Novated leases can be quite complex so, again, you'll need to understand what you're signing up for.

Like rent-to-own agreements, novated leases generally don't allow you to modify the car and associated car costs are typically packaged into your payments. You also have the option of purchasing the car at the end of the contract. But some novated leases may also come with restrictions on how much and where you can drive. The biggest difference between a novated lease and a rent-to-buy deal is that novated leases come with the benefit of making payments from pre-tax dollars and can provide a tax benefit.

See also: Car Loan vs Car Lease

Car subscription services

Car subscription services allow you to use a car by paying a regular subscription fee, much like how you do with Netflix or Spotify. Depending on the platform, there are a range of different makes and models on offer which you can switch between as often as you like. You are charged on a weekly basis and can cancel at any time.

Unlike rent-to-own deals, car subscription services don't lock you into a contract and there's no option to purchase the car. At the same time, all of the associated car costs like registrations and insurance are bundled into the one payment, just as they are with rent-to-own schemes.

Savings.com.au's two cents

Rent-to-own cars can be a quick and easy option for those needing a set of wheels, which can be exactly the problem.

Car loans can be difficult to get for a good reason - that is, if you can't afford one, a lender won't give you the money.

Although they sound fine in practice, in theory, rent-to-own cars can cost an extortionate amount, often far more compared to taking out a car loan or signing up to a lease arrangement.

Before entering into any rent-to-own contract, it's a good idea to seek professional financial advice and thoroughly explore other options that are open to you. If you opt to go down the rent-to-buy path, make sure you go over the contract carefully and understand the implications.

Image by Andrea Piacquadio via Pexels

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