Johannesburg - Bank declined? Low credit score? Blacklisted or under debt review? None of those are reason enough to bar you from buying a new vehicle - provided you can afford it.
It does sound too good to be true though: you don’t qualify for credit from any financial institution, or even a store card at a clothing retailer, yet you’re offered finance for a vehicle.
The “rent-to-own” model of ownership, for people who wouldn’t otherwise qualify for finance through regular channels, is taking off globally - but before you rush out to sign up, be aware of the potential pitfalls.
The adverts will probably draw the attention of anybody with a tarnished credit history: self-employed people with an unstable income, those who hit a financial wobble or lack a credit record, and those with judgments against them.
Option to buy
Type “rent-to-own” or “rent-to-buy” into a search engine and you will probably be inundated with offers of vehicles. Appliances have been sold via rent-to-own and hire purchase agreements since the 1960s, but rent-to-own for bigger movable and immovable property’s a more recent phenomenon.
Rent-to-own goods are leased in exchange for a weekly or monthly payment, with the option to buy them at some point. The transaction differs from a traditional hire purchase in that the lessee can terminate the agreement any time, without penalty (unless a deposit has been paid and therefore forfeited) and simply return the goods.
In Britain, there have been calls to regulate the rent-to-own industry - in particular retailers that entice low-income families with appliances and furniture that they pay off weekly.
In a column in the Guardian, Nils Pratley said the country’s Financial Conduct Authority should “deal with industry the same way it did with payday lenders and target all forms of high-cost credit”.
Last week Pratley reported that the financial watchdog ordered Britain’s biggest rent-to-own retailer, BrightHouse, to compensate nearly 250 000 customers £14.8 million (R275 million) as part of a reckless lending clampdown on the sector.
In a column headlined “The high street scandal that makes the poor pay more for less”, The Independent’s Personal Finance editor, Simon Read wrote: “It shows that the rent-to-own sector has more than doubled since the credit crunch as firms profit from struggling families who have very few options when it comes to spreading the cost of more expensive items.”
In the United States, a Federal Trade Commission study in 2000 found 80 percent of people who returned rent-to-own goods did so within the first six months.
Another study, by the University of Massachusetts in Dartmouth, found 90 percent of rent-to-own goods were returned with less than 36 percent of the payments made, suggesting such transactions are “more frequently used for short-term needs rather than as a method of acquisition”.
Worryingly, the FCA notes in its report, around half of the people who turn to rent-to-own experience some degree of late payment, with more than one in 10 thought to end up having their goods repossessed.
It lambasted “pay weekly” retailers such as BrightHouse for targeting low-income families, voicing concern about the high costs and harmful consequences of that type of credit.
“These firms continue to litter the high streets of our most deprived towns and cities, making hundreds of millions of pounds of profits from the growing numbers that don’t have any other options but to pay a poverty premium when borrowing,” said the FCA report’s author Gareth Evans, the director of the Financial Inclusion Centre. The firm hadn’t acted as a responsible lender since 2010, the authority noted.
One survey found BrightHouse was charging £1092 (the equivalent of R20 244) for a £358 (R6640) washing machine, its cheapest.
It’s not all bad though.
In South Africa, the rent-to-own scheme is being touted as a way for people to enter the vehicle buyer’s market, with many purchasing taxis, work and private vehicles through such agreements.
The vehicles are often latest models, which come with basic insurance, roadside assist and a tracking system as part of the deal. All costs are built into the monthly instalments and some allow you to upgrade your vehicle after 18 months.
If you pay diligently for the full term, you can take ownership of the vehicle at the end of it for a nominal fee. And if you decide to terminate the deal, it won’t blotch your credit record - but you'll lose your deposit and all the money you've paid towards the vehicle.
Avitha Nofal, a legal adviser at the Credit Ombudsman’s office, said that without looking at specific contracts, it was unclear whether those types of agreements would fall under the National Credit Act or the Consumer Protection Act, but affordability assessments had been a requirement since September 2015 - the year after the Satinsky Group’s “Drive-a-new-car-for-R699-a-month” scheme spectacularly imploded.
In that scheme, which was likened to a Ponzi, the instalments were so low that the business model was unsustainable.
The devil’s always in the detail, which is why the terms and conditions should be thoroughly read and understood before signing. And those terms and conditions appear to be weighed against the consumer: with deposits often in excess of R10 000 (or the equivalent of two months’ instalments) and loaded monthly instalments, if you fail you make a payment by the due date, “your” vehicle will probably be repossessed within a week and you forfeit the deposit.
Legal processes must be followed.
Norfal said there was concern around how repossessions were being conducted.
“For repossession to take place, this requires court process and a warrant for delivery for the vehicle to be uplifted from the consumer," she explained, "A credit provider can repossess a vehicle from a consumer only if there is a court order which authorises the credit provider to do this.
“A vehicle may be voluntarily surrendered by a consumer; however, the act makes provision for detailed process that must be followed by the credit provider, which would certainly not be the seven days.”
Before you rush out to look for your new car or workhorse, be warned that rent-to-own is not the consumer’s friend: you’re paying far more for the goods, the interest rate is astronomical and many such companies target the financially vulnerable consumer. The longer the contract, the more you’re going to pay. It’s convenience at a huge cost.
EIGHT QUESTIONS TO CONSIDER
How much more would you be paying for a rent-to-own vehicle? Ask for a breakdown of costs and compare the price you’d pay if you’d bought the vehicle directly from a dealer.
What does the insurance cover and what is the excess? Many of these policies are so basic you’re not even provided third-party cover so if you smash into a Lamborghini, it’s your baby.
Can you opt out of their insurance and take out your own policy? You might be able to, but you’re not likely to get a deduction off the instalment.
Is the vehicle new? If it has mileage, is there a maintenance plan?
What happens if it breaks down? Is that for your account and must the vehicle be taken to their approved workshop?
Are there late payment charges? What if you hit a wobble and can’t afford the instalment? Is there a grace period, or can you make a payment arrangement?
What about early settlement? Are you able to settle on the vehicle early and if so, do you get a discount - or penalty?
Is this a want or a need? Do you really need a new vehicle now - or could you save up, use other transport, and buy second-hand?