Rent to Own – what the FCA announcement means for you

Buying household items, like cookers, televisions and freezers, can be very expensive, particularly if you have to buy an emergency replacement. This is why it’s tempting to buy through companies allowing you to pay for these products in instalments. This is known as Rent to Own (RTO) and while it can seem like a good deal, high interest rates mean you end up paying far more than the item is actually worth.

What does the FCA announcement say?

The Financial Conduct Authority (FCA) review published in May 2018, found the need to protect financially vulnerable consumers targeted by the Rent to Own (RTO) market.

It is considering a cap on RTO prices and will now carry out a detailed assessment, with the aim of introducing changes in the RTO sector by April 2019.

The FCA is also considering banning the sale of extended warranties sold at the same time a consumer is finalising a RTO agreement.

What is Rent to Own?

Rent to Own (RTO) is a payment system most commonly used for household goods, such as fridges, washing machines and televisions. Companies offering this service include BrightHouse, Perfect Home and Buy As You View, but there are many others.

You get the product straight away and pay for it in weekly, fortnightly or monthly instalments, plus interest, typically over one to three years. These agreements often include insurance or warranty policies for the item.

The interest you will be charged varies, but many companies charge around 70% APR (annual percentage rate). This means you can end up paying substantially more than the item is worth over the course of the agreement.

What happens at the end of a Rent to Own agreement?

Depending on the terms and conditions you agreed to and the company you’re dealing with you might:

  • own the item outright
  • be given the option to purchase the item for an additional charge
  • end the contract and return the product
  • switch or upgrade the product, by taking out a new credit agreement.

What if I already have a Rent to Own agreement?

For the moment, nothing is likely to change and you will be required to continue to make your standard repayments. Any insurance or warranty included in the agreement is also unlikely to be affected for the time being.

You do have at least a 14-day cooling off period, so if you’re in the first two weeks of your arrangement, you can cancel it. The cooling-off period runs from the day the agreement is concluded, or from when you receive a copy of the agreement.

Depending on the terms and conditions, you might also be given the option to send the product back during the course of the agreement, but this might involve paying an additional fee.

Alternative ways to pay for purchases

Rent to Own can be a very expensive way to pay for larger household purchases and it’s worth looking at the alternatives.

Cut back or save up

See if there is any way you can cut back on other household expenses to find the money you need.

Use our quick cash finder to help you.
Use our Budget planner to see where you can make long-term savings.

If what you need to buy isn’t urgent, then see if you can save up the money first. It might take a while, but it will cost you less than borrowing the money.

Use our savings calculator to work out a plan.

Authorised overdraft

If you need to replace something urgently, you might be able to use an authorised overdraft, but make sure it’s authorised, or included in your interest-free overdraft limit. You will have to pay significant fees if you go into an unauthorised overdraft.

Using other forms of credit

If saving up for a purchase is not an option, there are several ways to borrow money at a lower interest rate than Rent to Own agreements.

But before you make a decision make sure you know:

  • exactly how much it will cost
  • whether you can afford the repayments.

Personal loans

Personal loans can offer good rates of interest, depending on your credit score. However, you might end up borrowing more than you need as most lenders will not offer loans of less than £1,000, which might be more than the amount you need for a household purchase.

Check out our guide on personal loans.

Credit cards

Credit cards are another option, but you need to be sure you can make more than the minimum repayment each month. If you can’t afford to make significant repayments, borrowing on a credit card can be very expensive.

Credit unions

Loans from credit unions are much cheaper than from other lenders and you can pay the money back at a rate you can afford.

Find out more about borrowing from credit unions.

Responsible Finance

If you’ve been turned down for credit by high street lenders, then you can look at fair finance providers. Their interest rates are lower than high cost credit providers, but higher than a credit union. Repayments are based on an affordability assessment which ensures the borrower can keep up with the repayments.

Find a fair finance provider in your area on the Responsible Finance website.

Pawnbrokers

Pawnbrokers are another option where you leave something valuable, such as jewellery, as security for a loan. The rate of interest you will be charged is normally lower than a high street bank and it’s unlikely you will get the full value of the item, but you will get a quick decision.

Borrowing from friends and family

Borrowing from friends or family might be an option which helps you avoid the risks of high-cost borrowing. Make sure you and the person you’re borrowing from:

  • work out an affordable repayment plan
  • discuss what will happen if you’re late or cannot afford to repayments
  • put your agreement in writing.

If you’re claiming benefits

If you’re on certain income-related benefits, including:

  • Income Support
  • income-related Employment and Support Allowance
  • income-based Jobseeker’s Allowance
  • Pension Credit
  • Universal Credit

you might be able to apply for a Budgeting Loan (or Budgeting Advance if you’re on Universal Credit) to cover the cost of:

  • furniture
  • baby items (such as cot or pram)
  • household appliances (such as cooker or fridge)
  • clothing or footwear
  • work clothes or tools
  • travelling expenses
  • childcare costs to cover training courses.
Discover more about Budgeting Loans and Advances.

Local welfare assistance

If you’re struggling to pay for an essential household item like a cooker, fridge or washing machine and you are getting certain benefits you might be able to find one through your local council’s welfare assistance scheme.

Some local authorities might also give loans to help you buy what you need:

How to avoid high cost credit

If you can’t take out a rent to own agreement and you would find it difficult to use the mainstream credit options, like an overdraft, personal loan or credit card you might be tempted by other kinds of high-cost borrowing like payday loans or doorstep lenders.

These forms of credit can work out to be very expensive and you need to think very carefully before you decide to borrow in this way. Before you make a decision read our guides.

Avoid loan sharks

Loan sharks are illegal lenders who often target people who are desperate and who can’t get mainstream credit. They might seem friendly at first but borrowing from them is never a good idea – even if you feel you have no other options.

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