Short of cash at Christmas? There’s always credit! One of the most pernicious is the “rent-to-own” scam.
Prompted by Aaron Ross Coleman’s New York Times essay, I thought that I would revisit some data I collected a couple of years ago on this exploitative industry.
Rent-A-Center has 10 stores in the Rochester area, two within a couple of miles of my house. Their website promises to “make your holiday dreams come true.” Dreams, sure. Bad ones: The rent-to-own business is the nightmare after Christmas.
As I write this on Christmas Eve, I’m assured that I can take home a 55-inch flat screen TV and PAY NOTHING. Today, at least. Aaron’s offers a Samsung UHD for only $69.99 per month. And it would be mine, free and clear, in only 24 months! Let’s do the math: That’s $1,700. You can buy the same TV from Walmart for $448,
Washing machine quit? Rent-A-Center will set you up with a Maytag top loader for only $86.83 per month—all yours after only 17 payments, a total of $1,476. Or you may buy the identical machine for $629 from Home Depot.
These retailers posts an “everyday low price” at which you can buy the product instantly. The difference between the total paid over time and the “everyday low price” gives us our first clue to the scam—this is effectively an interest rate. I took a sample of prices to compare—the effective rate ranged from a “modest” 26 percent to a truly heroic 214 percent. See the table below for an estimate of the retailer’s rate of profit. The range here is from 192 percent to 424 percent.
To be fair, these retailers are selling to a high-risk consumer. If you invite consumers with bad credit, you’ll probably get some! Their “repo” staffers stay busy, I expect.
But let’s be clear: These are predatory businesses. The fight against them should begin with consumer education, particularly with young consumers. Let’s find a place in our social studies and math curricula to explore how poverty is perpetuated through redlining in housing markets, payday lending, cash bail, and easy access to usurious credit. Perhaps teachers of middle-school math could organize field trips to Rent-A-Center and Walmart to study fractions and percentages.
New York does regulate these firms. The published “cash price” can’t be more than twice the merchant’s cost. The total of payments can’t be more than 2¼ times the cash price (although the RAC laptop shown above appears to be higher). Transparency is great.
But we could do more. New York has a usury law on the books—lenders can’t charge an annual interest rate higher than 25 percent. That law should be applied to rent-to-own schemes, too. If they wished to retain their profit margins, these retailers would be forced to increase the “everyday low price” substantially, giving consumers a more accurate picture of the true price.