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?
The rise of High Street Rent-to-Own
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:
Low weekly repayments (that can fit into your budget)
Free delivery to your home
Guaranteed replacement or repair during the period you’re making repayments
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?
Why Rent-to-Own may not be a sensible choice
When it comes to judging the merits of rent-to-own you need to consider two things:
The total amount you will end up paying for the item (compared to someone who pays by cash, or via some other form of credit)
Other commitments and risks you will be exposed to during the life of your rent-to-own agreement.
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:
You don’t own the washing machine until all the weekly payments have been made – you are merely renting it in the meantime
If you miss weekly payments you risk damaging your credit rating and could incur extra fees
If you get into arrears then the rent-to-own store can ultimately repossess the machine (and the payments you have made are effectively lost)
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?
Maybe Home Credit is the answer?
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:
You apply for £700 over 52 weeks and assuming you are accepted your loan is delivered to your home.
You can then shop around for the best deal to buy the Samsung washing machine – let’s assume you buy it from John Lewis and they deliver it to you.
You make weekly repayments of £25.20. At the end of the year you have paid a total of £1310.40 (an APR of 299.5%). While the weekly repayments are twice that of the rent-to-own provider the total cost over the life of the loan is 30% less than by using rent-to-own!
And in all the time you’ve been making repayments you have never been at risk of losing the goods nor exposing yourself to the risk of extra fees if you missed a repayment.
As with any credit funded purchase it pays to look at the total cost of credit and not just the weekly (or monthly) repayments.
Amigo Loans Introduces Amigo Store
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 more about Amanda Gillam