Rent-to-own: Soaking the poor

Here's a deal few would jump on: A chance to pay $2,000 for a $600 laptop computer, $1,200 for a $400 TV set, and nearly $2,700 for a used washing machine and dryer that only cost $935 when new.

It's probably safe to say most people would run the other way as fast as possible if asked to plunk down their hard-earned cash on those terms. Yet there's a booming market for such transactions in Maryland, where so-called "rent-to-own" stores are a $67 million-a-year industry, according to a new Maryland Consumer Rights Coalition report funded by the Abell Foundation.

The study's authors surveyed 15 rent-to-own stores in Baltimore City, Baltimore County andPrince George's County whose operators specifically target low-income and minority communities. The stores sell common household items at vastly inflated prices on installment plans whose interest rates can exceed 300 percent a year. It's a gold mine for the store owners, and the beauty of it is that under current Maryland law, such rip-offs are perfectly legal.

As the economic recovery continues to sputter, thousands of low- and modest-income families are struggling to afford the kind of appliances and electronic devices most people view as necessities despite their cost. But because their incomes are low, they can't simply pay cash for a new refrigerator, washer-dryer or television set, nor can they put it on a credit card (if they have one) without exceeding their limit.

That's why many of them end up at rent-to-own stores, which allow customers to lease appliances and furniture for what seems like an affordable weekly or monthly fee that is then applied to the purchase price of the item when the contract is paid off. For families on a tight budget, such plans can appear attractive because they don't require a large down payment, and the customer gets to take the item home the day the lease is signed instead of having the store keep it until it is paid off, as in traditional "layaway" plans.

What these customers don't see are the excessive markups on the goods they buy — often two or three times the wholesale cost — or the sky-high interest rates they are being charged when calculated on an annual basis. Nor may they understand the fine print on the contract that says if they miss a single installment, the store can take back the item the next day and resell it to someone else while keeping all the money they've paid up to then. That's what happens to 50 percent of rent-to-own customers, and when it does they're right back where they started: Out of luck.

The MCRC researchers found that the inflated prices and high interest rates that RTO contracts carry make them, in effect, a particularly pernicious form of predatory lending. And because the industry focuses on people who have few resources to begin with — the vast majority of RTO customers have a high school education or less and earn under $36,000 a year — the double whammy of exorbitant prices and high interest rates falls on those least able to afford them.

Currently, however, rent-to-own transactions fall outside most federal and state lending regulations, which treat them as short-term leases rather than as credit transactions. As a result, there are few limits put on the interest rates the stores can charge, nor are they required to disclose those rates to their customers. Of the 15 stores surveyed by MCRC, all were in compliance with Maryland's current price disclosure rules.

That's why lawmakers need to change the regulations governing the industry by capping the markup over wholesale costs dealers can apply to appliances, electronics and other goods and limiting the interest rates stores can charge on rent-to-own contracts. Maryland should also establish a limit on the maximum amount stores can collect over the course of a rent-to-own contract of twice the amount a customer would pay if the item were purchased with cash.

These measures, along with stronger financial disclosure rules and additional protections for consumers against having their purchases immediately repossessed and resold to someone else if they miss a payment, would save rent-to-own customers hundreds or even thousands of dollars a year that could be spent on other necessities. While the old adage caveat emptor — "let the buyer beware" — may still leave consumers with the ultimate responsibility for the financial choices they make, the state can't ignore its duty to protect the most vulnerable citizens from such obvious abuses.

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