Legislation that would regulate rent-to-own stores has popped up in Illinois and in D.C., but neither bill has strong enough protections for consumers of this extremely high-cost service. The national legislation is particularly harmful—it would prohibit stores from disclosing the interest rate on rent-to-own transactions and preempt stronger state laws. On the eve of the launch of the Consumer Financial Protection Bureau, these industry-backed bills remind us why we badly need a strong consumer watchdog with the authority to regulate financial transactions that occur outside of traditional banks.
Rent-to-own transactions allow customers to purchase household goods, such as furniture, electronics or other items, by making a low down payment and signing a contract agreeing to make periodic payments for one to two years. If they make all of those payments, they keep the products. If a customer misses payments, the item is reclaimed by the store, which keeps payments made prior to the return. Consumers can also buy an item outright for the cash price listed at the store.
The total amount a consumer pays for a rent-to-own product is many times more expensive than its actual value. Consider this example: one Illinois consumer entered into a rent-to-own agreement for a used TV, which had an average new sale price of $1019. The rent-to-own company established the cash value for this used item at $1,760, a considerable markup. The customer agreed to make payments for 89 weeks totaling $3,801—this means the consumer is paying nearly four times the value of a new TV for a used version.
A bill introduced earlier this year in the Illinois Senate (S.B. 54) would provide some consumer protections, but not enough to prevent rent-to-own stores from drastically inflating prices. The proposal focuses on improving disclosure, including a comparison of the rental price and the cash price and the amount of each payment. It would modestly cap prices—the cash price can only be 1.75 to 2.15 times the merchant price, while the total number of payments would be capped at 2.25 times the cash price. These caps are higher than what stores typically charge, so they would do very little to limit costs. We think protections should go further: the store should disclose the manufacturer’s recommended price to prevent inflating the cash price to shroud the difference between the cash price and total of payments. Additionally, the store’s cash price should reflect the true value of the item, especially for used items.
We believe that the consumer should pay less for used items than for new ones, even if they decide to return the item. The Illinois bill would lower the price of used items by reducing the number of payments, but that doesn’t necessarily mean a consumer would pay less for the item. For example, a consumer could make payments for 12 months for a new item and 8 months for a used one. If a consumer returns the used item after 6 months, they will have paid the same amount as the consumer who returns a new item after 6 months. Stores should lower the price by reducing the monthly payment for used items, not by reducing the number of payments.
The national legislation (S. 881 and H.R. 1588), sponsored by Sen. Mary Landrieu (D-LA) and Rep. Francisco Canseco (R-TX), is even less consumer-friendly than Illinois’. Among other things, the national legislation would preempt any state law that treats rent-to-own transactions as credit or requires the disclosure of the interest rate. The bill focuses on disclosure and makes no steps to reign in the sky-high costs of rent-to-own transactions. In fact, it even stops stores from disclosing the true cost of the item—it prevents lenders from disclosing taxes and fees for optional services, like insurance, in the total cost. Because taxes and ancillary products can add substantially to the true cost of a rent-to-own purchase, lenders should be required to disclose the full cost.