Educational Resources: Loan to Own

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Rent to Own

Although there are many similarities between secured installment loans and rent-to-own services, there are very important differences.

Secured installment loans are loans that are repaid in equal monthly payments for a specific period and are secured by the item you purchased. You can use the item you purchased while you are paying. Rent-to-own allows you to use an item for a short period of time. You make weekly or monthly payments in exchange for using the item.

You do not have to purchase the item. However, if you decide to purchase the item, the store will set up a plan for you to rent the item until it is paid off.

The store is the legal owner until you make the final payment. If a payment is missed, the store may repossess the property, which means you do not own anything.

With installment loans, you are charged interest and you can shop for the best deal by comparing APRs. Rent-to-own agreements are technically not loans, so no "interest" is charged and, often, no credit check is performed. However, by making the weekly payments, you will pay much more than if you paid by cash. The difference between the cash price and your total payment is just like interest you would pay on a loan. Generally, installment loans are less expensive than rent-to-own agreements.

For example, a local electronics store was selling a television for $500. A nearby rent-to-own store advertised the same model for $15 a week.

At the rent-to-own store, you may own the television after an extended period of time, perhaps 72 weeks. Multiply $15 x 72 weeks and you would end up paying $1,080. Also, if you miss one payment, the rent-to-own store would take the television back. If you make 60 payments on time that's 60 x $15 = $900 and miss payment 61, you would lose the television and be out $900.

In addition, you could return the television with no obligation. However, If you use the rent-to-own company and return the television after a year, you would pay $780 that's 52 weeks x $15 = $780.

Installment Loan

If you purchase the television at the electronics store for $500, as an example, you may be able to obtain a 1-year installment loan with a 10% APR.

By the end of the year, you would pay off your loan and pay a total of $527.52. Your monthly payments for the installment loan would be approximately $43.96, which is less than what you would have paid with a rent-to-own agreement that's $15 x 4 weeks = $60 a month.

By obtaining a short-term installment loan, you could save $552.48 ($1,080 - $527.52 = $552.48) in the above example. Now, let's look at car loans.