Rent-to-own cars: pros and cons

A car is an essential for many of us, but buying a car is a major expense. If you can’t afford to buy a car outright, or you’re not eligible for a car loan, an alternative path to owning a vehicle can be rent-to-own cars. But while rent-to-own cars can be a way to get on the road sooner, it’s very important to read the fine print before signing a contract, because rent-to-own cars can turn out to be expensive.

How do rent to-own-cars work?

Rent-to-own, sometimes called rent-to-buy, is a system wherein you pay a weekly rent in return for the use of the new or used car of your choice. At the end of the set rental period, you pay an agreed amount to buy the car.

This lump sum amount, or ‘balloon’ payment, may be nominal, potentially as little as $1. But you do not own the car until you’ve made all your payments.

As the Moneysmart website points out, rent to own is not the same as a consumer lease – rather, it’s a type of purchasing arrangement. It is also worth noting that a number of providers offer rent-to-own car services, so there can be differences in the way each service operates.

Why would you choose a rent-to-own car?

Unlike taking out a car loan, rent-to-own doesn’t involve borrowing money. This means the rent to own provider will likely inquire about your income and whether you can afford the required rent payments. For example CarCoop states its minimum requirements are:

• You must be at least 21 years of age
• Hold a P2 driver’s licence or above
• You must be employed & have a weekly income of at least $800.00

Aside from this, no formal credit checks may be required. This can make rent-to-own appealing for people who may find it difficult to be approved for a car loan. For example, if you have a poor credit record, a history of bankruptcy or if you don’t have any credit record at all (which could be the case if you’re a new arrival to Australia), rent-to-own cars may get you on the road sooner.

How much do rent-to-own cars cost?

The cost of rent-to-own cars varies between providers. But it’s worth noting that Consumer Protection Western Australia is advising caution over rent-to-own finance agreements for used cars, as they could end up costing consumers far more than the vehicles are worth.

In general, you could be asked to pay the following:

• Initial set-up fee: Also known as a security deposit, the set-up fee is a one-off payment made at the start of the rent to own deal. Where it applies, this fee can vary in line with the age or value of the car. For example, with rent-to-own car service Freedom Cars the set-up fee can range from about $500 to around $3,000.
• Weekly rental: How much you will pay in weekly rent normally depends on the rent to own car service as well as the vehicle you select. At the time of writing, rent to own cars can cost between $130 and $320 per week.
• Early termination costs: Rent-to-own deals can specify a minimum rental period – potentially as little as one year, but it could be four to five years. If you want to hand the car back before the rental period has expired, you may be charged a termination fee. This may include a fixed fee plus an early termination penalty based on the value of your remaining rent payments, less the sale price the car achieves at auction.
• Lump sum or balloon payment: You may need to pay a lump sum amount to your provider before you can get full ownership of the vehicle at the end of the contract. Be sure to read the fine print to know what this cost will be – and that you’ll be able to pay it when the time comes.
• Stamp duty: If you decide you want to own the car at the end of the rent-to-buy period, you will likely need to pay stamp duty (at the rate levied by your state/territory government) to change the car over to your name.

Are any car costs included in the rent?

Cars come with plenty of ongoing expenses, and with some rent-to-own car the person renting the car is responsible for paying costs such as vehicle maintenance, registration and insurance.

Some providers such as CarCoop, say the weekly rental payments include registration, CTP insurance, comprehensive car insurance, one year of scheduled servicing and roadside assistance. While this means you don’t have to budget for these extra costs, you won’t have the opportunity to shop around and compare prices to know if you’re getting the best possible deal.

What are the pros and cons of rent-to-own cars?

If you’re considering a rent-to-own car arrangement it is worth doing plenty of research. Talk to different providers and carefully read the terms and conditions of rent-to-buy contracts to know exactly what the rent covers – and what it doesn’t. In the meantime, here are some of the pros and cons to weigh up with rent-to-buy cars:

Pros of rent to own cars:

• Potentially fewer credit checks: As you’re not taking out a loan, a rent-to-buy car provider may not complete any credit checks at all. This can be a plus if you have a few dents in your credit record.
• Lower upfront costs: You can be up and running with a car for as little as $1,000 (possibly less) in upfront costs.
• Key costs may be included in the rent: Some rent-to-own cars come with registration and insurance included as part of the regular rent payments. This is generally because the rent to own company remains the owner of the vehicle until the end of the arrangement. Having these costs included in your weekly rent means you won’t have to budget for these expenses.

Cons of rent-to-own cars:

• You don’t own the car until it’s fully paid off: While you’re making rental repayments on the car, ownership of the vehicle will usually remain with the provider. You only become the owner after you have completed the instalments and the contract is finished. As you aren’t the registered owner of the car until that point, the vehicle can’t be used as security for any loans you may apply for.
• Fees and penalties: Applying for a rent-to-own can be a quick process, but it is important to ask the provider about any ongoing fees and charges as well as termination fees or penalties for breaking the agreement early.
• Rent payments could add up to more than the value of the car: As already mentioned, caution is advised over rent-to-own finance agreements for used cars, as they could end up costing far more than the vehicles are worth. The Moneysmart website also notes that rent-to-buy arrangements can end up costing more than if you purchased an item outright. If you’re unsure about this, the Moneysmart site features an online rent versus buy calculator that can help you crunch the numbers.  Websites like Redbook provide information about the market value of older makes and models.

Are rent-to-own cars a good idea?

Rent-to-own can have pluses and minuses. The key is to consider if rent-to-buy could see you pay more for a vehicle than necessary, and to weigh up whether it offers better value compared to other ways to finance a car.

If you do choose a rent-to-own car, read the contract carefully. It’s important to be confident you can meet the regular rent payments and know your responsibilities around maintaining the vehicle, so that the car has lost as little of its value as possible by the time you become the owner.

Cover image source: Andrii Zastrozhnov/Shutterstock.com