Are you ordering from a rent-to-own company and paying a fortune? Join Personal Loans Now as we explore how a rent-to-own price cap would help.
- How rent-to-own products would be priced after a cap
- Rent-to-own products and late payment fees
- How a price cap would help rent-to-own customers
- Other issues to address about the rent-to-own market
- When the price cap will be imposed
The Rent-to-Own Price Cap
It’s been over a year since the idea of a price cap on rent-to-own consumer products was first suggested. In order to make sure the topic continues to attract media attention, Citizens Advice released a press bulletin in July 2018 explaining how a cap would help consumers. In this article, we examine this issue in depth. We explain why many view a price cap as the answer to many of the abuses in the rent-to-own market. We also look at what the FCA is doing. How near are they to imposing a cap, or will there be alternative changes?
How Would Rent-to-Own Goods be Priced after a Cap?
In their July 2018 press release, Citizens Advice took the example of how much a 6-kg washing machine would cost a rent-to-own customer before and after the imposition of a cap. The figures below assume that the rent-to-own price cap would be similar to the payday loan cap and ensure that consumers would pay no more than double the amount borrowed.
|Before cap||After cap|
|Price of Item||£265||£160|
|Cost of delivery /installation||£27||£45|
|Additional costs (interest)||£291||£205|
In this one instance, Citizens Advice have shown how consumers would pay £174 less (or 30%) over their 3-year agreement. They calculate that the average saving on all household items would be 28% or £276. According to their calculations, total savings for rent-to-own customers would be £62 million on the purchase of 245,000 household products (statistics from their March 2018 report ‘Rent to Return?’)
Rent-to-Own Products & Late Payment Fees
Another issue Citizens Advice highlighted about rent-to-own credit agreements is the high additional costs that borrowers pay for late or missed payments. Their research found that 60% of customers make at least one late payment and pay £10-£12 each time. Over the course of the credit agreement, the average they pay is an extra £72.
As part of the price cap on rent-to-own products, Citizens Advice believe that the late payment charge should have a limit of £15 per agreement per year. This would ensure that the amount customers owed didn’t spiral out of control.
How Would a Cap Help Rent-to-Own Customers?
As well as making essential household goods more affordable, a price cap would allow rent-to-own customers to budget better. This is because they would know exactly how much they would pay. The problem with the rent-to-own market is that many borrowers enter into an agreement without considering the total cost of the loan. Additionally, their primary concern is to see how much their weekly instalment is and whether they can afford it. In fact Citizens Advice found that a quarter of customers didn’t even know the total cost of their borrowing after interest was added over the 3 years.
Other Issues about the Rent-to-own Market
Apart from the question of a rent-to-own price cap and late payment charges, there are a number of other issues which the FCA still need to address in the rent-to-own market.
Apart from their markup on household goods and appliances, rent-to-own companies often charge more than twice other retailers for delivery and installation and also have expensive add-ons like warranties and insurance. The insurance policies they sell can be 5 times higher than those found from specialist insurers for one household object.
The FCA is considering whether to ban the sale of extended warranties at the point of sale for all consumers and for all goods. They estimate that this could save UK consumers up to £7.7 million a year.
The Question of Affordability
All companies offering consumer credit products should carry out an affordability check to make sure that borrowers can afford their financial products. The question is how robust the affordability checks carried out by rent-to-own companies are.
Citizens Advice research identified the typical rent-to-own customer as being financially vulnerable. They were often single parents; in rented accommodation and many were living on one income, unemployed and/or unable to work because of ill health or a disability. They were also more likely to be behind in their priority bills such as energy bills or Council Tax.
The question is whether their rent-to-own agreement made their financial problems worse. Citizens Advice statistics would suggest that it did. 50% said that they had had to borrow to make their rent-to-own instalment.
Should it be Renamed ‘Rent to Return’?
The most shocking statistic is that only half of rent-to-own agreements are completed (and the reason why Citizens Advice’s March report was entitled ‘Rent to Return?’). A borrower default level of half suggests that something is seriously wrong with their checks of borrowers.
Let’s think about the implications of this for a moment. Could you imagine a situation where long term loans direct lenders was only repaid by half of its borrowers? It would soon go out of business. However, rent-to-own is slightly different since upon default, the company will reposses the consumer goods. These can then be sold as second-hand goods while the rent-to-own company has already received more than enough money from its price markup, additional fees and interest. It is only the consumer who misses out; after having paid weekly instalments (possibly for years), at the end they have nothing to show for it.
When Will the Rent-to-Own Price Cap be Imposed?
Although Citizens Advice is very keen on a rent-to-own price cap, the FCA has been a little more cautious in their statements. They have said that the evidence is ‘sufficient in principle’ to justify a cap but have said they are also open to other options during this period of consultation. Moreover, they will need to consider its impact and how it could be structured. As far as the time-frame is concerned, the FCA consultation will continue throughout 2018. If they decide it’s appropriate, a price cap on rent-to-own agreements will come into effect from April 2019.
There is no doubt that rent-to-own companies perform a valuable service for people who are excluded from mainstream credit facilities and 70% of whom can’t afford to pay for household goods upfront. However, there must be more regulations to protect vulnerable consumers. After its success in clearing up abuses in the bad credit personal loan industry, a price cap seems to be the best option.