Looking at Rent to Own Autosby Steve Cypher on Wednesday, October 17th, 2012
Buyers with less than perfect credit out shopping for a car should know why dealers that offer a rent to own auto financing could care less about their credit situation while other dealers look at it a different way.
At Auto Credit Express we do know the difference because for the last twenty years we’ve been helping car buyers with credit problems find dealers that can arrange car loan approvals. So here is where we’ll try our best to explain the difference between the loans offered through our dealer network and those offered by used car lots that advertise rent to own cars.
Since the words “renting” and “leasing” are often taken to mean the same thing, the used car lots that offer rent to own autos are hoping you’ll think it’s the same thing as leasing, but it’s not.
With traditional new car leasing, monthly payments are generally lower than traditional retail auto financing because you’re only paying for that portion of the vehicle you actually use.
As this applies to a 2 year lease, during the lease term you end up paying 24 months of interest charges (in leasing it’s called the “money factor”). Also included in the lease charges is the first 24 months of the vehicle’s loss in value (depreciation).
Since typical new car leases don’t require a down payment, the person leasing the vehicle is nearly always “upside down” (the vehicle is worth less than the buyout) while the vehicle is being leased (the ideal lease is designed so that the vehicle is worth the buyout amount only at the very end of the lease).
Because people who lease generally have none of their money invested in a down payment that could offset any potential loss should they walk away from the car, lenders consider leasing to be a higher risk than retail financing and usually offer this option only to the most qualified applicants – car buyers with very good to excellent credit.
Rent to own financing programs
Rent to own cars, on the other hand, are more closely related to buy here pay here (BHPH) finance programs. This means that loans taken out at rent to own (RTO) car lots will require down payments as well as a fixed number of weekly or bi-weekly payments (with a small buy-out at the end of the loan). Like in-house financing programs, RTO payments are usually made in person at the car lot where the vehicle was rented from.
Rent to own customers that fall behind in payments or encounter other issues deal with the rental company regarding any payment arrangements. Failing to follow the terms of the rental contract will result in either the rental company or a firm representing the rental company repossessing the car.
Like most tote the note dealers, RTO companies have the option of whether or not to report loans and payments to the credit bureaus. Because of the paperwork and costs involved in reporting, most do not. Another drawback to this type of financing arrangement is the fact that the vehicles available for rent are typically older used cars because most rent to own car lots are not franchised new car dealers.
Pros and cons
In a nutshell, then, here are the arguments for and against RTO cars:
• Most rental vehicles are in the moderate to lower-price range and some people actually prefer to make payments on a weekly basis.
• Rental payments are made face to face so you know your agent.
• Many rental companies won’t run a credit check before renting you a car.
• For consumers with horrible credit, an RTO loan may be the only choice
• Rent to own car lots typically won’t report loans or payments to the credit bureaus.
• Because RTO vehicles are usually older, many are not that reliable.
• It’s not always convenient to visit the rental lot every week to make a payment.
• Rental terms typically range from 12 to 24 months, limiting vehicle selection to lower-priced, older cars.
The Bottom Line
Car buyers with credit problems shouldn’t confuse new car leasing with the term “rent to own” or RTO. Secondly, if you’re interested in cheap transportation without a credit check, then the rent to own cars dealer wins because auto loans that can improve your credit scores always require a credit inquiry.
However, even with a credit score below a 640 FICO or with a credit rejection from a traditional lender, if you want to improve your credit situation you should only consider a rent to own car lot after you’ve checked out another option.
That option is offered through the Auto Credit Express web site where we match applicants with dealers that can give them their best chance at auto loan approvals with lenders that report loans and payments to the credit bureaus.
So if you’re ready to reestablish your car credit, you can begin now by filling out our online auto loans application.