Should you buy that new washing machine or sofa using a rent-to-own plan? Or should you pay with a credit card? The best course of action may be neither alternative. If you can live without the product for a while, it generally makes more sense to save your money and pay cash for such items. No interest charges. No ongoing payments.
If, however, you need the item now and can't wait, you're probably better off using a credit card to make such purchases. With a rent-to-own purchase, consumers typically lease an item for a set weekly rate. After making payments for a prescribed number of weeks, they own the product.
Proponents tout certain advantages of this arrangement, such as the option of returning or replacing damaged products. They also argue that renting-to-own keeps your credit intact because you simply return the product if you can't make the payments.
Proponents don't, however, advertise the high cost of these rental contracts. Using a credit card for just about any product is significantly cheaper than renting-to-own. To determine which scenario is cheaper, do the math.
Select an item for comparison, then multiply the weekly payments times the number of weeks needed to purchase the product. Be sure to include all taxes, warranty charges, and other fees in your calculation. Next, subtract the cost of the same item if you purchased it with cash. The difference is the cost of renting-to-own.
Say, for example, you rent a $250 (cash value) television set for 78 weeks (18 months) at $13 a week, after which you own the product. Your total cost would be $1,014. That's $764 in interest and charges.
What happens if you return the television after just a year of renting? You will have paid $676 for a product you don't own - more than twice its cash value. No credit card company will charge that much in interest over a comparable period.
Bottom line: If you can avoid using credit to make your purchases, do so. If not, use a low interest credit card and pay off the balance as quickly as possible.
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