How does the rent-to-own sector work and who are its customers?

A price cap to prevent rent-to-own firms charging over the odds for essentials such as cookers or washing machines has been proposed by the Financial Conduct Authority.

Here is a look at how rent-to-own works, who uses it and why – and how much more they are paying.

– How does rent-to-own work?

Rent-to-own retailers offer household goods over periods of around one to three years under hire-purchase agreements.

Consumers typically make weekly payments and have the option to take ownership of the goods when they have made all the payments.

– What are the costs to consumers?

While weekly payments may be low, over time people can end up paying several times what it would have cost them to buy an item in one go.

Given that most consumers purchase both insurance and extended warranties, the FCA estimates the total cost of a typical rent-to-own agreement will be around three times the average mainstream retail price.

A rent-to-own customer may pay £800 over three years for a fridge that would cost £260 on the high street. In some cases, prices are four or even five times the median average retail price.

– What changes to rent-to-own has the FCA announced?

The FCA is proposing a cap whereby credit charges cannot be more than the cost of the product – so people will not end up paying more than double the price of an item.

Alongside this, it is introducing a two-day cooling off period for the sale of extended warranties – which will effectively ban firms from selling these warranties at the point of purchase.

BrightHouse outlet
BrightHouse and PerfectHome account for 90% of outstanding rent-to-own agreements (PA)

– Why do people use rent-to-own?

The FCA’s consumer research found customers tend to focus on weekly repayments more than how much the total bill is going to cost.

The most common reason for rent-to-own purchases is that the consumer’s current item had broken – and this is particularly the case when people need white goods, research from the regulator found.

A third (33%) wanted to upgrade to a better product.

Nine in 10 (90%) consumers buying household appliances said their purchase was essential, dropping to 51% for electronics.

– Who is the typical rent-to-own customer?

Only one third of these consumers are in work and most have low incomes. They are more likely to live in the most deprived areas of the UK, a quarter say they have missed a bill payment in the last six months and a third have suffered anxiety or stress due to financial difficulties.

Customers are the least creditworthy individuals compared with other users of high-cost credit and they may be particularly likely to have low financial literacy levels, the FCA found.

– How big is the rent-to-own market?

As of November 2017, there were around 300,000 customers with outstanding rent-to-own debt across the market.

The FCA said two firms, BrightHouse and PerfectHome, account for just over 90% of outstanding rent-to-own agreements.

– What else is the FCA looking at?

The sector is just one part of its high-cost credit review and the regulator’s overall aim is to make sure credit is fair, accessible and appropriate, particularly for vulnerable consumers.

Other areas which have come under its microscope include overdrafts, home-collected credit and catalogue and store cards.

The FCA will shortly publish conclusions and proposals for overdrafts, and will also publish the results of a review into retail banking.

– Why do people use high-cost credit?

The FCA said people use high-cost credit products for numerous and complex reasons.

Some people may have limited alternatives, or they may not be aware of them.

The FCA has been working to address this issue with Government, the private sector and the voluntary sector.