Electronic retailer Best Buy is rolling out a new lease to own program that would have consumers potentially pay double the retail cost of products. The program takes advantage of people with poor credit for no other reason than, they can.
Lease To Own Program Background
People wishing to purchase an item using the lease to own program agree to 12 monthly payments that may add up to over double the retail cost. The terms of the agreement state the consumer doesn’t own the item until the last payment is made.
Best Buy claims the program is for people who cannot get traditional financing through Citi, the financial institution behind Best Buy’s store credit card. They try to paint the picture their lease to own program is a path for people with poor credit to get desired products while positively rebuilding their credit.
Why I Dislike The Program
These claims are questionable, and bother me in several different ways.
- According to the article, viewed as a loan the lease to own program would represent a 195% interest rate. Show me any reputable lender that charges that kind of an rate.
- The usual justification for charging higher interest rates is risk. If a person has poor credit, they have a higher risk of not paying. Thus they charger a higher interest rate to generate more revenue to make up for those that default. But in the article a Best Buy representative is quoted saying less than 1% of people using this kind of program go delinquent. If that’s so, then what is the justification for the astronomical interest rate? Oh, that’s right, because they can.
- The program preys on people’s lack of self control as well as their need for instant gratification. Sure, you could wait and save up for 5 months and pay cash for a new big screen television. Or you could have it right now and just make payments for 12. It’s amazing how many people will choose payments, even if it means they pay double the price.
I certainly believe companies have the right to make a profit. But there’s a difference between selling products for a fair and reasonable profit, and taking advantage of the people that can least afford it. With this new program, Best Buy is doing the latter.
What do you think of this lease to own program, EOD Nation?
At first sight I can see how rent-to-own or leasing can seem predatory. If you look at the overall price to lease vs. the original cost of the item, the difference is significant. But think about the alternatives for folks who have poor credit or no credit. They can get an in-store credit card, pay minimum payments, late fees, etc. year after year and the total cost of that item skyrockets as well as kills their credit even more. Worse, they can get a pay-day loan and pay 4 to 10 times what they originally borrow. Rent-to-own actually gives them a disciplined plan for paying something off in 12 months (or less).
I don’t see rent-to-own options at Best Buy any differently than a car lease, a mortgage, or anything else you’d like to have but don’t have the cash or credit to afford at this given moment. At least with Best Buy’s program you own the product after 3,6 or 12 months. With a car lease, you return the car and own nothing.
Thanks for sharing your thoughts, Brian – however I see a significant difference. While it certainly be done, it’s extremely difficult for the average consumer to maintain the kind of self control and discipline for the amount of time needed to save to by something as expensive as a house or a car with just cash.
But in many cases with Best Buy’s lease to own program we’re talking about people walking into Best Buy and having a case of the “oooh, shiny!” syndrome with a big screen television or a computer. They don’t necessarily need it, and they would only have to save up for 5 months to pay cash for it.
But instead, they choose to pay double the price and make 12 payments instead.
Travis, I agree with you on a personal level since you and I both probably keep our finances in order. “oooh, shiny!” syndrome is just as relevant to people in financial trouble as it is to those who are in a better financial situation. But having worked with many people in this “subprime” segment I’ve found that more often it’s a matter of being able to buy things they NEED instead of just “ooh, I WANT.” It’s the single mom making the best living she can but can’t afford to pay for her son’s laptop for school. It’s the family that’s fallen on hard times and needs a couch to make their meager house feel more like a home, or replace an essential appliance that has recently broke down. Saving up for 5 months isn’t an option for them so they pay affordable payments over time that—yes, cost more in the long run—but allow them to get what they need without putting themselves in more dire financial trouble. My point is that lease-to-own often makes a lot more sense to people that have no credit, bad credit, or a thin credit file. Overall price doesn’t matter to them. Affordability now does.
Points taken – however, I then go back to the fact that Best Buy is then taking advantage of people with less financial resources by essentially charging them 195% interest? Does the low rate of delinquency (by their own admittance) justify such an outrageous interest rate?
I get it. But rent/lease-to-own is a huge market and there are a lot of people who enjoy buying that way. There’s a different mindset with the willingness to pay threshold and decision-making context. I hate paying a 1200% markup on popcorn and soda at the movies, but shamefully I still do and enjoy it 🙂