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Customer Experience with Rent-to-Own Transactions

DOI:10.1509/jppm.21.1.126.17615
Authors:
James M. Lacko
James M. Lacko
James M. Lacko
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Signe-Mary McKernan
Signe-Mary McKernan
Signe-Mary McKernan
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Manoj Hastak at American University Washington D.C.
Manoj Hastak
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Abstract

The authors examine the characteristics and experiences of rent-to-own customers using a nationwide survey of 532 customers and 11,575 non-customers. The authors find that most customers have low incomes and education levels, but most have a motor vehicle and some type of credit card or bank account; most customers use RTO transactions to purchase merchandise, not merely as short-term rentals; and most customers are satisfied with the transactions and are treated well if they are late making a payment, though some experience abusive collection practices. The authors discuss the implications of the findings for public policy.
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Customer experience with rent-to-own transactions
James M Lacko; Signe-Mary McKernan; Manoj Hastak
Journal of Public Policy & Marketing; Spring 2002; 21, 1; ABI/INFORM Global
pg. 126
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... Rent-to-own (RTO) services rent such households goods as furniture, appliances, and electronics through a self-renewing weekly or monthly lease and offer immediate access to the goods, typically without a down payment or credit check (Lacko, McKernan, and Hastak, 2002;McKernan, Lacko, and Hastak, 2003). Thus, RTO services appeal to low-income consumers who cannot afford a cash purchase or may not qualify for credit, but they charge consumers higher costs (Lacko et al., 2002;McKernan et al., 2003). ...
... Rent-to-own (RTO) services rent such households goods as furniture, appliances, and electronics through a self-renewing weekly or monthly lease and offer immediate access to the goods, typically without a down payment or credit check (Lacko, McKernan, and Hastak, 2002;McKernan, Lacko, and Hastak, 2003). Thus, RTO services appeal to low-income consumers who cannot afford a cash purchase or may not qualify for credit, but they charge consumers higher costs (Lacko et al., 2002;McKernan et al., 2003). According to Lacko et al. (2002), the total amount consumers must pay to own the item is two to three times higher than the retail price of comparable goods, although consumers may benefit from RTO services (e.g., easy return, free delivery, relatively low monthly payment, no credit qualification). ...
... Thus, RTO services appeal to low-income consumers who cannot afford a cash purchase or may not qualify for credit, but they charge consumers higher costs (Lacko et al., 2002;McKernan et al., 2003). According to Lacko et al. (2002), the total amount consumers must pay to own the item is two to three times higher than the retail price of comparable goods, although consumers may benefit from RTO services (e.g., easy return, free delivery, relatively low monthly payment, no credit qualification). They also found that younger households, Blacks, the less educated, nonhomeowners, low-income households, those with a dependent child, and those living in the South or non-suburban areas were more likely to use RTO. ...
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... The overall cost involved in RTO contracts is known to be prohibitively expensive, but a majority of consumers are unaware of the greedy nature of rental agreements (Zikmund-Fisher & Parker, 1999). As RTO contracts are inherently complicated and multifaceted (Lacko, McKernan, & Hastak, 2002), regulatory attempts have leaned towards revealing the total cost of rental purchases by mandating the disclosure of annual percentage rate (APR) and miscellaneous charges (Nehf, 1991). While most states such as Maine and New York had implemented strict disclosure requirements (Beales, Eisenach, & Litan, 2012), several states in the US including Arkansas, Indiana, Oklahoma and Texas did not explicitly specify the items that should be disclosed on a contract and, therefore, created a loophole that could be exploited by RTO lenders (APRO, 2014). ...
... Before the implementation of these disclosure policies, the APR information was often not provided or presented in a non-standard way that considerably understates the actual costs. Previous studies generally illustrated the demand-reducing impact of disclosure mandates, reaching up to nearly 30% reduction in the probability of RTO use (Lacko, McKernan, & Hastak, 2002;McKernan, Lacko, & Hastak, 2003). ...
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Recent studies have suggested that financial literacy is an important determinant of informed borrowing decisions. Despite the evidence that financially literate consumers are less likely to use alternative financial services, the mechanism through which financial literacy discourages demand for alternative financial services has yet to be fully understood. The previous studies proposed several explanations, such as the ability to undertake complex financial calculations and understand contract terms, to link financial literacy to savvy credit choices. This study evaluates the validity of this argument by examining whether or not financial knowledge plays a greater role in borrowing decisions, where consumers are forced to rely on financial knowledge. It is assumed that consumers in an information-sparse environment have a greater incentive to utilize financial knowledge to infer the hidden cost of borrowing contracts. To test this argument, this study examines the extent to which information availability moderates the negative impact of financial knowledge on rent-to-own transactions. Information content is captured by state-level disclosure mandates for rental contracts, given that consumers in a loosely regulated state are exposed to less pricing information. The results illustrate that limited information strengthens the negative association between financial knowledge and rent-to-own transactions. This confirms the previous arguments that consumers are active thinkers who refer to financial knowledge to estimate the overall cost of borrowing. This article is protected by copyright. All rights reserved.
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... The implementation of this policy may lead to disparate outcomes. For example, rent-to-own properties are significantly more likely to be used by Black renters and are used in a predatory fashion to attract individuals who are less financially stable (Anderson & Jaggia, 2009;Lacko, McKernan, & Hastak, 2002;McKernan, Lacko, & Hastak, 2003). Farm laborers-nearly two thirds of whom are Hispanic-are often subject to price gouging by private landlords (U.S. ...
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... The recommendations include providing efficient structures for cooperation between the public and private sectors and considering the needs of the financially excluded and rural populations, which may be different from those of urban populations. However, it also is worth noting that previous research (for example, [53,54]) has demonstrated that consumer education and/or disclosure may not impact consumer use of high-cost borrowing behaviors such as payday loans and rent-to-own if those are the consumers' "best-worst" options. ...
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