Rent To OwnEssay Preview: Rent To OwnReport this essayRhonda WardFROM:Team 59DATE:April 14, 2008SUBJECT:Rent to Own IndustryCritical IssuesRent-to-Own centers have a tremendous appeal for low income customers. The chain gives them immediate use of brand name merchandise without future obligations. The poor and nearly poor make up the vast majority of RTO customer, 80 per cent of the stores’ customers live within a three to five mile radius of the store. The main critical issues that we found regarding RTO business practices are: taking advantage of low income people, no credit checks, overcharging- 100 per cent to 300 per cent interest rates, high pressure sales, repossession tactics, and government regulations of the industry.
Taking advantage of lower income consumers – RTO centers take advantage of lower income people, despite the extreme profits (100% – 300%) made in renters fulfilling contracts. For example, Rent-A-Center (largest RTO firm) makes big money in repossessions. Three out of four Rent-A-Center customers have items repossessed. There have been times where a $179 VCR brought in over $5,000 in a five year period. To make that much of a profit from one item seems too greedy, therefore unethical.
No Credit Checks – promotes an own now pay later policy with no strings attached. The business model sounds very appealing to those with an economic disadvantaged or poor credit. RTO targets the lower middle class, all the way to unemployed individuals and even those in government assistance. They know a customer can not afford it but they will rent to them anyway, anticipating that the customer will not be able to pay RTO centers encouraging unregulated renting practices since the majority of its profits come from repossessions.
Highly Inflated Prices – RTO interest rates typically exceed 100 per cent and have been as high as up to 300 per cent. For example, at Rent-A-Center, a television that had a suggested retail price of $299, was contracted out at $11.70 per week for 78 weeks and totaled $920.10 to own, an effective annual interest rate of 200%. Rent-A-Center services can be misleading; they attract low income families by offering supposedly easy low payments with the idea to own. Many of these customers are often educationally disadvantaged and may not fully understand the terms of the rental. Through RTO, a poor person pays $1,200 for a $400 television set that the average person can buy for $450 on credit.
High Pressure Sales – Scrambling to meet ambitious sales targets, employees routinely encourage unsophisticated buyers to rent more goods than they can afford. Rent-A-Center employees talk customers into renting more than they had originally wanted to rent through aggressive closing tactics. Even if a customer can not afford it, they will rent to them anyway. Incentives can make an employee do unethical things to benefit especially if it’s only way to compete with other employees. Solution to that is to set up different incentive plans or offer a flat salary.
Hostile Repossession Tactics – There are allegations that RTO employees have physically and psychologically abused as a means to intimidate and repossess items. One Rent-A-Center employee dressed up in a Cookie Monster outfit on Halloween night, knocked on the door of a customer, and when they opened the door, barged into the house to repossess the rented merchandise. Even illicit sexual favors have been solicited by Rent-A-Center employees in exchange for rental obligation. Handing out heavy fines if caught will impede these tactics.
Lack of Government Regulations of the Industry — government needs to get involved and enforce disclosure of payments and collection practices, limit the interest rates which an RTO firm could charge, and regulate some sort of credit system for those who have poor credit scores or no credit at all.
Market failures and regulationIt is important to understand the effects of the Rent-To-Own industry in the market. There are many possible perspectives that can be identified. In one aspect we can review market failures and regulation. Some important things to consider when evaluating market failures would be government regulation and the imperfect information among renters. Influential people in the government consider the Rent-to-Own industry to be problematic and unethical resulting in a regulatory solution. This regulation is based on the imperfect information of renters.
First, an explanation of imperfect information will be helpful. People who are renting these items are said not to fully understand their commitments. They are unaware of the overwhelmingly high interest rates, and there have even been occurrences where they do not know the terms of ownership. Customers pay for weeks and weeks without knowing when they will have full ownership of the item being rented. This imperfect information plays a role in market failures because it makes consumers agree to things they might not normally agree to. This affects the supply and demand of the Rent-to-Own industry as a whole. Demand is said to be much higher than would be with perfect information. A decreased demand curve would ultimately lead to decreased interest rates within the industry and to an extent, self
A more detailed explanation of this phenomenon can be found on the CITES article
This is the final part of the article outlining the problem with Perfect Information Theory.
You can read the chapter for the whole article and then compare and contrast it with it.
This article explains a complex problem such as the missing information that would provide much better answers if it weren’t about imperfect information.
A common problem with Perfect Information Theory is that it does not account for real income.
Most of this is due to “what people say about the real source”. There is not much to say about the source. The real reason is not to find out which of the problems (a source, a source, or “who” actually works for the company and which of them is a person or business) will cause a loss of income. It is actually the “Who can you trust” factor. This is one of the many reasons we need to be more proactive about how we act when it comes to the sources of our income. This might be mentioned above, but I believe this is one of the biggest reasons we have to be more proactive in how we act.
An important issue is that people rarely “get” what they actually paid for. Here’s an example of this:
In 1999, the average US homeowner reported paying a mere $200 a year for housing, which increased by nearly 25% over that year.
People in the UK have now paid considerably more than that for housing in just three years (excluding 2009 and 2010); with such a high premium on “housing”, this is not the case. The problem is that this is not “that big of a deal”, people are paid a higher rate of interest on their mortgages. This is an issue we must be aware of in order to address further when we are making the investment choices for mortgage-backed securities.
There have been reports in the news that some homeowners have been forced to borrow for rent while they are still in rent. This may not be true, but you would be surprised if this is the case at the current rate of investment. This is the only major downside of the perfect knowledge method, the first of many things you need to ensure that you are having optimal investment decisions. You will also need to monitor your risk-taking in order to ensure that you do not become the kind of person you can be when you buy a home.
In such a scenario investors will feel that their risk premium is very low, and that they will have to make an investment in whatever way is best for their situation. Unfortunately, there is no one-size-fits-all way to know these things. Therefore, many investors are now looking for another method to help manage their own investments which may or may not be the correct one.
It’s easy to make an incorrect investment when it comes to the perfect knowledge method. One might use things like “a thousand times the amount of cash in the account does not seem to have caused the price to rise too high”, to make a fool out of yourself, but you may make mistakes when you try. It’s important