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Updated: 28 November 2016
You know the stomach-churning feeling when the usually reliable washing machine breaks down. Suddenly your weekly routine is shot to pieces. How are you going to get today’s laundry done? What about tomorrows? Where’s the nearest launderette? How are you going to catch up with the backlog? It’s a nightmare that we’ve all been through at one time or another.
And if your machine, or any other appliance or gadget for that matter, has got to the point where repairs just no longer make economic sense then maybe it’s time to replace it. If your budget is tight and your savings are low or non-existent then you’ll need to get your replacement on credit. But how to do it?
Buying household items on credit is very common. Historically that might have meant your local Curry’s store or DFS. Here you would negotiate the price and also the terms of credit over say a 12 month period. You’d take ownership and make monthly repayments. But repaying in monthly chunks over a 12 month period means that each payment could be large and budget-busting. So in recent years, we’ve seen the arrival of the so-called rent-to-own high street stores where you can choose your goods and then make low weekly repayments over an extended period such as 2-3 years. Your budget may be able to accommodate an extra £5-10 per week so where’s the harm? In fact so tempting are the low weekly payments why not buy a new iPad or upgrade a piece of furniture? Surely that’s OK?
On the face of it rent-to-own has many strong selling points:
But maybe this isn’t the whole story? Maybe these headline benefits hide a different truth, and maybe there are better ways of getting what you want – either the same item for less or a better item for little or no extra cost?
When it comes to judging the merits of rent-to-own you need to consider two things:
Let’s pick an item you can get from a rent-to-own store to demonstrate the issues. We’ll go back to our nightmare scenario at the start. You need to buy a new washing machine. We’ll pick a Samsung product from the website of the leading rent-to-own company. It’s a decent brand with a decent specification. The cost is £12 per week – the price of 4 or 5 loads at the local launderette. No problem then?
But you will be paying £12 per week for 156 weeks (3 years). That’s a total of £1872! On top of that you will have to make sure the product is insured, and if you don’t have contents insurance then that will cost you £1.64 per week – an additional £255.84 over 3 years bringing the total cost to £2127.84! You can buy the same washing machine from John Lewis for only £669 (inc. free delivery and 5-year warranty) – so in this example rent-to-own will cost you around 3 times as much as paying cash. The annual interest rate charged by this weekly payment company is 69.9%.
In addition to this eye-watering cost of finance you need to keep in mind the following:
So, if you can’t afford to buy the washing machine outright with cash how can you buy it on more affordable finance and while lowering the risks too?
In our scenario let’s assume quite reasonably that you’d like to make weekly repayments so that you can budget for your replacement washing machine. Then the option to consider is home credit. With home credit you apply for your loan online. If the amount you have asked for is judged to be affordable and you are accepted for the loan amount your cash loan will be delivered to your home. You then make weekly cash repayments to your local agent who comes to your home.
If we use the UK’s largest home credit lender in our example then the alternative way to get your new washing is as follows:
As with any credit funded purchase it pays to look at the total cost of credit and not just the weekly (or monthly) repayments.
The UK’s largest guarantor loan lender has produced a new online store, Amigo Store, that allows people to buy a wide variety of household using Amigo’s credit. They estimate that the typical user could save up to 50% compared to using one of the weekly payment rent-to-own companies.
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read about Amanda Gillam
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