By Trevor Clawson.
When it comes to consumer goods, there are luxuries and there are essentials. And if an essential happens to be a cooker or washing machine costing £300, then finding the money to purchase the item outright can be a huge challenge to a great many people.
‘Rent-to-own’ deals offer one means to acquire expensive products without an upfront outlay, but the total amount paid out by the buyer can, in some cases, be two or three times the recommended retail price over the terms of the payment plan.
Concerned that some of the most vulnerable people in society need protection, the Financial Conduct Authority (FCA) has announced plans to introduce a cap on the premium payable on ‘rent-to-own’ goods, with the new rules set to come into force in April next year.
Under a typical rent-to-own transaction, a consumer will buy a product – anything from furniture to white goods – and pay through a weekly rental arrangement over a set period of time. This could be anything up to three years.
When the payment period expires, the customer owns the item in question. Effectively this is a form of credit, with interest included in the weekly rental payment. In other words – as is the case with any credit purchase deal – the buyer pays for the convenience of spreading the cost. However, acquiring goods through a specialist rent-to-own retailer can be more expensive than other forms of credit. For instance, as the FCA points out, a £200 item could cost £600 or £800 in total.
From one perspective, retailers who offer ‘rent-to-own’ are providing a valuable service that allows their customers to make small, affordable payments over a lengthy period. The concern, voiced by the FCA Is that the premiums charged are simply too high.
Announcing its proposed cap, the Financial Conduct Authority said that ‘rent-to-own’ customers tend to be among the most vulnerable in society. In financial terms, they typically earn between £12,000 and £18,000 per annum, and with very little cash to spare, many have missed at least one bill payment over the last six months.
The financial status of ‘rent-to-own’ customers may preclude them from accessing other – and cheaper – forms of credit, such as bank loans or the interest-free credit deals offered by many High Street retailers. Thus, as the FCA points out, despite having less money to spare, ‘rent-to-own’ customers are paying more for essential products than those with higher incomes.
So under the FCA plan, the credit charges associated with rent-to-own deals will not exceed the ticket price of the product. For example, if a washing machine costs £300 the final price should not be more than £600. In addition, prices quoted should be benchmarked against at least three other retailers.
Bringing Down Prices
Commenting on the move, the FCA’s Chief Executive, Andrew Bailey said:
“Today’s measures are designed to bring down very high prices in the rent-to-own sector, which is used by some of the most financially vulnerable in our society. A cap will prevent firms from charging over the odds for essential everyday items like cookers or washing machines. We believe a cap is the only intervention that will effectively tackle the highest prices.”
By the regulator’s own estimate, a cap on charges will save consumers something in the region of £22.7m a year as charges come down.
In addition, the FCA has proposed a two day cooling off period for the sale of extended warranties – insurance products linked to the purchases – and a ban on them being sold at the point of sale. Such warranties are seen as a way in which additional costs are applied to a rent-to-own transaction.
The proposed cap has been welcomed by the Citizens Advice, which itself estimates that restrictions on rent-to-own could save consumers as much as £62m a year.
“This cap is a victory for people who struggle with the runaway costs of rent-to-own agreements,” said Chief Executive, Gillian Guy “A cap gets to the heart of the problem by stopping costs from spiralling out of control.”
Striking a Balance
With any cap, there is a balance to be struck. These days, many mainstream online stores offer their customers an opportunity to access credit (rather than paying by card) at the point of sale. A typical deal might involve repayment over 12 months with interest payable at around 25% APR. Thus a £400 laptop could cost around £500 to buy over 12 months – a cheaper deal than would be available through the specialist ‘rent to own’ companies that are the focus of the FCA proposals.
However, not everyone can access this kind of credit deal – either because they wouldn’t be able to afford the monthly payment over 12 or 18 months, because their financial and employment circumstances would rule them out during the credit check process.
There is, therefore, a place for rent-to-own plans that allow those on low incomes or benefits to access agreements offering low weekly repayments, albeit at a higher rate of interest. In capping the credit charges, the FCA is seeking to strike a balance between protecting the vulnerable, while allowing rent-to-own providers to continue to offer a service that clearly has an appeal to many consumers.
Consumers do have alternatives in the shape of rent-to-own plans offered by charities and not-not-for profit organisations. These include the Smarterbuys store, Fair For You and the Square, which sells furniture to those aged 50 and over.
Each of these has their own business models, but they were created to serve much the same audience as commercial rent-to-own operators such as Brighthouse, Buy as You View and Perfecthome. Over 104 weeks, Smarterbuys charges interest of around 24%. Fair For You’s rates come it around 3% per month.
The market is changing in favour of the consumer. The FCA proposals may be subject to change over the consultation period, but they should result in cheaper deals from the market leaders. Meanwhile, not for profit operators are offering alternatives.