So, what are rent-to-own cars and what are some of the pros and cons of this type of arrangement?
What is a rent-to-own car?
A rent-to-own car is one that you agree to rent for a set period of time while making regular repayments as part of a commitment to buy it. These repayments contribute towards the rental costs as well as the eventual purchase of the vehicle. At the end of the rental agreement and when you have made your final payment, the provider will sign ownership of the vehicle over to you.
In some cases, you may be required to pay a lump sum amount at the end of the rental agreement in order to own the car, which may be nominal.
What are the pros and cons of rent-to-own cars?
If you’re considering a rent-to-own arrangement it is worth doing your research and carefully reading the terms and conditions of a particular contract before signing up to consider if it is suited to you. While these can be a relatively easy and fast way to gain access to a car, the Australian Securities and Investments Commission (ASIC) warns on its MoneySmart website that some rent-to-buy arrangements can end up costing consumers more in the long run.
So, could a rent-to-own car be right for you? Here are some of the pros and cons to consider when deciding:
- Potentially fewer credit checks. With rent-to-own cars, credit checks may not be as rigorous as those carried out when applying for a car loan. In some cases, the provider may not do any credit checks at all. This could mean people who historically had a poor credit rating could be accepted, however it is always a good idea to consider what the payment amounts are to determine whether you can afford them and avoid financial hardship.
- Rebuild your credit. If you maintained your weekly or fortnightly repayments, there could be a benefit to your credit score, particularly for people who do not have a high credit rating. However, the reverse is also true in that if you don’t make repayments in time, it could negatively impact your credit score.
- Convenience. Some rent-to-own cars come with registration and insurance included as part of the weekly or fortnightly payments. This is generally because the rent-to-own company retains ownership of the vehicle until the end of the arrangement. This may help keep the payments consistent with less additional surprises.
- You don’t own the car until it’s fully paid off. While you’re making rental repayments on the car, the ownership will remain with the provider and it is turned over to you after you have completed the instalments and the contract is finished. Because you don’t own the car during the rental period, you will be unable to make any alterations to it or use it as your own asset for other borrowing or financial purposes.
- Lump sum payment for ownership. 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. This will depend on the agreement you have made, so make sure to read the fine print before signing up.
- Higher fees and repayments. Although it may be easier to apply for a rent-to-own car, there are sometimes more fees involved than with other options. These can include account-keeping fees, late payment fees, direct debit fees and termination fees for breaking the agreement or paying the car off early. Some of these fees can be quite substantial and, when stacked together along with the repayments, may make a rent-to-own arrangement more expensive in the long run than purchasing a car outright.
What about car leasing?
A car lease is similar to rent-to-own agreements in that both options allow you to ‘borrow’ a vehicle for an agreed period while making regular repayments. Like rent-to-own, leasing usually gives you the option to purchase the vehicle at end of the agreement.
While there are many similarities between rent-to-own and car leasing, there are also some differences worth noting.
With rent-to-own agreements, the vehicle is usually guaranteed to be yours after the contract has finished, unless you have not made all of your repayments, sometimes requiring a lump sum payment. However, this also usually means that you will be contractually required to buy the car at the end of the lease, even if you don’t want it any more. On the other hand, with a car lease, you typically have the option to return the car, upgrade to a newer one or pay a lump sum to make the car yours once the lease term has ended.
Rent-to-own agreements also tend to be arranged for the personal use of a vehicle, whereas car leasing options can be used for personal or business purposes. Some of the types of car leasing options available include novated leases, finance leases and operating leases.
What is the difference between novated leasing and rent-to-own?
A novated lease (also known as salary sacrificing) is an arrangement between you, your employer and the lease provider. Within this arrangement your employer allows you to pay for your vehicle out of your pre-tax income. This means your income tax is then calculated on your reduced salary. Novated leases are typically for two to five years. Once the lease ends, you have the option of paying a pre-determined fee (often called a balloon payment) to buy the car or you can sign a new lease for an upgraded vehicle.
On the other hand, with rent-to-own, your employer does not take part in the arrangement and the lease repayments are not taken from your pre-tax income. You are also unable to sign a new lease to upgrade your vehicle at the end of a rent-to-own agreement.
Is a rent-to-own car for me?
Rent-to-own cars have their benefits and drawbacks, which may or may not work for you depending on your current circumstances. They can be a convenient option for some people, but they will also typically be more expensive overall than buying your car outright. Before jumping into a rent-to-own contract, it is essential to know whether it could suit your situation, including whether you can afford the repayments (including any additional fees and charges) in the long-term.
Bear in mind that if you do choose one of these arrangements, it is important to make your repayments on time and to keep the car well-maintained as this could lead to a more sellable asset at the end of your contract.
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