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?
From 1 April, the interest or charges you can pay on new Rent to Own (RTO) agreements will be limited to no more than the cost of the product.
This means, if you buy a fridge from a RTO company for £250, you will pay no more than £500 in total, including interest and other charges.
The sale of extended warranties alongside RTO products has already been banned. You will still be able to buy extended warranties, but there will now be a two-day cooling-off period before you can take one out.
Prices RTO companies can charge will be benchmarked against what three mainstream retailors would charge, including the costs of delivery and installation.
Small RTO businesses will have to comply with these regulations for all products sold after 1 October 2019. But, for products they were already offering before April 2019, the new rules will not apply.
The FCA is planning a further review into the price cap and benchmarking from April 2020.
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.
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?
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.
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.
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 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.
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.
Loans from credit unions are much cheaper than from other lenders and you can pay the money back at a rate you can afford.
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.
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:
- 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.
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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