What is Rent to Own?Rent to Own typically means that you want to buy something but you don't have enough money to pay for it all up front when you take possession of it. When this happens you have two options. The first option is that a bank loans you the money but gives it to the seller, who then gives you the item, and you repay the bank over time. The second option is that the seller is the one who extends the loan to you, also known as Seller Financing. So, instead of paying for it all up front, all at once, the seller agrees to let you take the item now, up front, and allow you make smaller monthly payments directly to them over time until you have completely paid for the item. It is important to note that although you take "possession" of the item up front, you do not take "ownership" of the item until you have paid the seller in full as per the terms of your agreement. Also, because allowing you to pay over time involves some risk, the seller will charge you an interest rate or a premium price. Once you have paid for the item in full the arrangements of your repayment term will amount to you paying more for the item than the item was actually sold for. This extra money is the seller's reward for waiting to be paid in full and agreeing to taking the risk that you would in fact fully pay for the item as some point in the future. And because arrangements like this typically involve the buyer paying the seller directly (instead of to a bank or some other third party) this is called "buy here pay here".
Rent to Own car dealerships work the same way. And while most, if not all, "rent to own" car dealerships are "buy here pay here", not all buy here pay here (also known as BHPH) are rent to own. So Buy Here Pay Here dealerships are not always the same thing as Rent to Own. At Max Auto Sales we understand it can be confusing, and you can make your car payments here at our dealership, but we are not Rent-to-own. We are a better option, in our humble opinion, so let us explain.
If you have bad credit and you need a used car you usually only have three choices:
- Borrow a car from a friend or family member, which is ok until it isn’t.
- Buy a used car the traditional way buy using a subprime car loan at a higher interest rate,
- Or buy a used car in a rent-to-own scheme.
Usually when you “rent to own” a car you will have to make your weekly payments at the same place that you got the car from, so it is considered Buy Here Pay Here. Except that you are not actually buying a car in the traditional sense. And with subprime loans you usually also make your payments at the same place so it is also considered to be Buy Here Pay Here, but that is not always the same thing as Rent-to-Own. Hence the confusion. The difference lies in when "ownership" of the item passes from the seller to the buyer. With Rent to Own arrangements ownership of the item almost always passes from seller to buyer AFTER the buyer has fully paid for the item as well as any financing or premiums. With Buy Here Pay Here it is possible for the ownership of the item to pass from the seller to the buyer up front, so that the buyer actually owns the item immediately, as is the case with Max Auto Sales here in Lafayette, Louisiana.
At Max Auto Sales you are actually buying a used car, not renting it. Once you pick out the used car you want and you sign the documents, you have actually bought your own car, not rented it. It is now your car. If you did not have all the cash necessary to buy the car up front then you like, most people, have had to borrow the money from a bank in order to buy the car. You put up a down payment and the bank loans you the rest of the money you need. However, the bank does not give the money straight to you; instead, the bank has given that money to Max Auto Sales on your behalf to pay for the remaining balance on the car you have purchased. So now, the bank has given the money you needed to the dealership, the dealership has sold the car to you, and you have to repay the bank in monthly installment payments until you have fully paid them back, plus interest. The bank will hold a lien against that vehicle until you have paid them back, and once you do you will be mailed the title to the vehicle. Those monthly payments to the bank are what is known as your monthly car note, or car payment, in the traditional sense. And just like when you buy a brand new car in the traditional sense at any major dealership, although you have bought a car, and you are listed as the owner, the bank holds the title to the vehicle until you have fully paid the loan off, and then the bank will release the lien against the vehicle and you will be mailed the title to the vehicle.
Dealerships like Max Auto Sales in Lafayette, Louisiana typically sell cars both to customers with great credit and poor credit. Depending on your credit you may have been offered either a very low prime interest rate or higher subprime interest rate. Either way once you complete the purchase you have now bought a car in every traditional sense of the word. It is your car; you picked it out and signed the papers. If you didn’t have all the money upfront that you needed to buy the used car then like most people you went to a bank (or the car dealership negotiated on your behalf) and borrowed enough money to buy the car, or to make the difference between your down payment that you had available. So now you have the car, and you are making payments on your loan back to the bank. At Max Auto Sales, the bank we use has offices in our building so many people also consider us to be a Buy Here Pay Here car dealership, even though we are not rent to own. In addition, Max Auto Sales does report to the credit bureaus so buying a car from Max Auto Sales is a great way to both get a great used car and help rebuild your credit by paying your loans back consistently and reliably on time.
Stop wasting money on rent to own. You can own your own car for about $10 per day!* Click here to apply for a second-chance car loan today at Max Auto Sales. *WAC. People with a past history of bankruptcy or repossession in the past 5 years will have a more difficult time being approved. Typical payments average between $9 and $14 per day. Typical down payment is about 10% of the price of the car, plus TT&L.
Good Credit vs. Bad Credit and Interest Rates
Interest rates on used cars are usually slightly higher than those offered on new cars. It’s just an industry fact. At Max Auto Sales depending on your credit history the bank you are getting a car loan from may offer you a very low prime interest rate the same typically as if you had received your used car loan from anywhere else. Or if you have poor to very bad credit then you may be offered an interest rate reflective of your credit history and past financial decisions, probably 10% or more, and be in the sub-prime loan category. People are not always comfortable admitting it but really an interest rate is something you “earn” based on your past trustworthiness with managing money and repaying loans. Getting a high interest subprime loan does cost more in interest, but it is the bank’s reward for taking a higher risk than normal by loaning you money. If you repay the loan as promised, then that will be reported to the credit bureaus and improve your credit score. In a way you could look at it as buying back your good credit, and next time you get a car loan you will be able to do so at a lower interest rate. Of course the opposite is true if you don't pay the loan back as agreed and your credit history shows a repossession because you didn't pay for the loan or decided to "give the car back".
How Rent-to-Own Works
One benefit of rent-to-own cars is that they're easier to get. The rent-to-own market allows people to get a car without requiring a credit check and that makes it much easier to qualify for a purchase if your credit is less than stellar. But keep in mind that the car dealer is taking a much bigger risk by NOT checking your credit. As a reward, or payment for taking that risk, they are going to sell you a used car at a MUCH higher selling price that you would typically get at a regular used car dealership like Max Auto Sales. Regular car loans and even subprime loans requires a credit check because the people loaning you the money want to know how likely you are to pay them back. But with a “no credit check” “rent to own” used car dealer all you usually need to show is proof of identity, residence and income. Payments are made on a weekly rather than monthly basis and usually range from $75 to $100 per week and sometimes up to $200 per week depending on the base price of the car. There are no interest costs in the traditional sense of the word that can build up but that is because the dealership has usually made up for that by charging you double what the car is worth. Generally, you make payments directly to the car dealership and so Rent to Own in this case is also a Buy Here Pay Here used car dealer. Sometimes if you purchase from a large chain, payments may be managed using a national bill-paying service.
Car dealers that offer rent-to-own options usually cater to the subprime market and offer for sale used cars that are high-mileage and could otherwise be sold at auction. The Rent to Own dealership will sometimes sell these cars for a 100% mark-up – usually double the auction price – and base the rental price on this. So if a rent-to-own dealer offers you a price of $10,000, it is likely he bought the car for $5,000 at auction. Of course you’ll be required to make a down payment and in addition, weekly payments that add up to the final sales price of the used car. So again while the dealer won’t charge you interest, he makes his money on the 100% mark-up on his original cost for the car, plus any rental fees he adds during the rental period. Here is one of the ways Max Auto Sales is different, and why we are not considered to be rent-to-own. At Max Auto Sales we do our best to price our cars at or below market value, not double. We even try to be the lowest price around within 100 miles for the same used car found elsewhere with the same or comparable mileage, age, and condition. Every business has to make a profit in order to pay its employees and a Rent to Own used car dealership usually does it with the high sales price of the car instead of interest. As such, there is no way to pay the loan off early to reduce your interest costs and save some money like there is with a traditional or even subprime simple interest loan you would get at Max Auto Sales.
Rent-to-Own vs. Subprime Loan
When considering rent-to-own versus a subprime auto loan, you should do a calculation to be sure the rent-to-own option makes sense for you. We at Max Auto Sales believe a subprime loan might be the better choice. With Rent-to-Own you are probably paying more, much more, than the car is worth when compared to average market car prices for the same vehicle make, model, mileage, age, and condition in the same region. Your final repayment total does not change whether you repay in 2 months or 32 months. And, depending on the papers you signed and deal you negotiated, after you have finished paying all the rent to own payments you may still have to come up with a lump sum payment to pay for the sales taxes, DMV fees and registration, all typical fees included in the phrase “tax, title, and license” that are necessary for the final transfer of ownership of the car to you. In contrast when you use a traditional car loan or even a subprime loan to purchase a used car Max Auto Sales includes the tax, title, and license in the total price of the car and are already factored into your monthly notes just like every other traditional car purchase at any new car dealership, whether you buy new or used. That way when you buy a car at Max Auto Sales and are finished paying your car notes and have repaid the loan back, you are done: the car is yours, and there are no surprise lump sum payments at the end. Plus there is an added benefit to doing a car loan instead of rent to own. With a car loan, interest is factored monthly. So if you pay your car note off in 2 months, or come into some money or tax refund and pay your car loan off in only 6 months, or even a year, then you have only paid for the interest for that term; for as long as you were paying the note. In other words you have only paid 2 months worth of interest, or 6, or 12, depending on how many months it took you to pay the loan back in full. That can potentially save you a big chunk of money! Not only do you pay an average fair market value for the car (instead of sometimes double like in a rent-to-own situation) but you also have the opportunity to save money by paying off the loan sooner. That is something you simply can’t do with a typical “rent to own” car dealership because remember they build in that extra money into the sales price of the car; there is no way to pay it off early and save money. For this reason alone we at Max Auto Sales believe it is better to choose a subprime higher interest loan to buy a car than it is to do a “rent-to-own” arrangement. Of course that can vary depending on your situation and the maximum interest rate you are being charged. Some states even limit the maximum amount of interest that can be charged for a used car loan to help stop exorbitant or unfair business practices that some used car dealers have done in the past.
Pros and Cons of Rent-to-Own
Here are the pros of getting a car through a rent-to-own program:
• Ownership – At the end of the rental term it is possible that you will own the vehicle, but check to be sure whether you first need to make an additional and often unexpected lump sum payment before you own the car. With a subprime loan paying for a traditional used car purchase this is not a concern because the tax, title, and license are already built into the note.
• No credit checks – A credit check is not required for most rent to own car sales, and most rent to own dealerships do not report on your credit. As you know reporting your payment history can help you can build a better credit history in the future (as long as you make on-time payments). At Max Auto Sales, because you are getting an actual car loan we automatically report to the credit bureaus to help rebuild your credit.
And here are the cons:
• Over-priced cars – Rent-to-own cars are usually marked up more than other used cars because that’s how the dealer makes a profit. (There is no interest on these cars, and he’s not profiting from the sale of a subprime loan.) At Max Auto Sales we sell cars at or below market value, and try to be the lowest within 100 miles for the same year, make and model.
• Frequent payments – You pay back the loan weekly, far more often than the average car buyer (who pays monthly). Having to make 52 payments a year can make it easier to miss a payment and incur a late fee. Max Auto Sales typical payment plans are either every other week, or monthly, depending on how you get paid. Plus we can set it up for automatic debit so you never miss a payment and never have to pay late fees!
• No warranty – Typically there is no warranty on a rent-to-own contract, so if the car breaks down the week after you sign the contract, it’s your problem to fix. In contrast, a used car warranty is available for purchase on every car we sell at Max Auto Sales, plus we can include that cost into your monthly payments!
At Max Auto Sales we want to be the best used car dealership in Lafayette. Heck we also want to be the best used car dealership in New Iberia, Broussard, Abbeville, St. Martinville, and Crowley. We also want buying a used car to be simple, hassle free, and have you smiling at the end knowing you got a great deal on a great used car. Come see us, ask questions, and find a great deal. If you have questions about this or anything else, just ask me, Brian Leleux, or anyone here at Max Auto Sales; you’ll be glad you did. For your next used car Max Auto Sales is the place to come regardless of where you live in Acadiana.
- + Disclaimers