Rent To Own

TO: Rhonda Ward

FROM: Team 59

DATE: April 14, 2008

SUBJECT: Rent to Own Industry

Critical Issues

Rent-to-Own centers have a tremendous appeal for low income customers. The chain gives them immediate use of brand name merchandise without future obligations. The poor and nearly poor make up the vast majority of RTO customer, 80 per cent of the stores’ customers live within a three to five mile radius of the store. The main critical issues that we found regarding RTO business practices are: taking advantage of low income people, no credit checks, overcharging- 100 per cent to 300 per cent interest rates, high pressure sales, repossession tactics, and government regulations of the industry.

Taking advantage of lower income consumers - RTO centers take advantage of lower income people, despite the extreme profits (100% - 300%) made in renters fulfilling contracts. For example, Rent-A-Center (largest RTO firm) makes big money in repossessions. Three out of four Rent-A-Center customers have items repossessed. There have been times where a $179 VCR brought in over $5,000 in a five year period. To make that much of a profit from one item seems too greedy, therefore unethical.

No Credit Checks - promotes an own now pay later policy with no strings attached. The business model sounds very appealing to those with an economic disadvantaged or poor credit. RTO targets the lower middle class, all the way to unemployed individuals and even those in government assistance. They know a customer can not afford it but they will rent to them anyway, anticipating that the customer will not be able to pay RTO centers encouraging unregulated renting practices since the majority of its profits come from repossessions.

Highly Inflated Prices - RTO interest rates typically exceed 100 per cent and have been as high as up to 300 per cent. For example, at Rent-A-Center, a television that had a suggested retail price of $299, was contracted out at $11.70 per week for 78 weeks and totaled $920.10 to own, an effective annual interest rate of 200%. Rent-A-Center services can be misleading; they attract low income families by offering supposedly easy low payments with the idea to own. Many of these customers are often educationally disadvantaged and may not fully understand the terms of the rental. Through RTO, a poor person pays $1,200 for a $400 television set that the average person can buy for $450 on credit.

High Pressure Sales - Scrambling to meet ambitious sales targets, employees routinely encourage unsophisticated buyers to rent more goods than they can afford. Rent-A-Center employees talk customers into renting more than they had originally wanted to rent through aggressive closing tactics. Even if a customer can not afford it, they will rent to them anyway. Incentives can make an employee do unethical things to benefit especially if it’s only way to compete with other employees. Solution to that is to set up different incentive plans or offer a flat salary.

Hostile Repossession Tactics - There are allegations that RTO employees have physically and psychologically abused as a means to intimidate and repossess items. One Rent-A-Center employee dressed up in a Cookie Monster outfit on Halloween night, knocked on the door of a customer, and when they opened the door, barged into the house to repossess the rented merchandise. Even illicit sexual favors have been solicited by Rent-A-Center employees in exchange for rental obligation. Handing out heavy fines if caught will impede these tactics.

Lack of Government Regulations of the Industry вЂ" government needs to get involved and enforce disclosure of payments and collection practices, limit the interest rates which an RTO firm could charge, and regulate some sort of credit system for those who have poor credit scores or no credit at all.

Market failures and regulation

It is important to understand the effects of the Rent-To-Own industry in the market. There are many possible perspectives that can be identified. In one aspect we can review market failures and regulation. Some important things to consider when evaluating market failures would be government regulation and the imperfect information among renters. Influential people in the government consider the Rent-to-Own industry to be problematic and unethical resulting in a regulatory solution. This regulation is based on the imperfect information of renters.

First, an explanation of imperfect information will be helpful. People who are renting these items are said not to fully understand their commitments. They are unaware of the overwhelmingly high interest rates, and there have even been occurrences where they do not know the terms of ownership. Customers pay for weeks and weeks without knowing when they will have full ownership of the item being rented. This imperfect information plays a role in market failures because it makes consumers agree to things they might not normally agree to. This affects the supply and demand of the Rent-to-Own industry as a whole. Demand is said to be much higher than would be with perfect information. A decreased demand curve would ultimately lead to decreased interest rates within the industry and to an extent, self