Rent to own: Citizens Advice’s perspective
Since the FCA stepped in to regulate payday loans, an increasing number of people have been turning to rent to own shops and getting into problem debt as a result. Our new research looks into what is causing those problems.
What is rent to own?
Rent to own companies sell household electronic items through expensive hire purchase agreements. The agreements typically require consumers to make weekly instalments, last for three years and have an interest rate of up to 99.9%. Unlike other consumer credit purchases, the product does not belong to the consumer until they have paid off the entire amount, including interest.
Who are the key players in the rent to own market?
The rent to own market in the UK is dominated by three firms; BrightHouse, Perfect Home and Buy as You View. BrightHouse control the large majority of the rent to own market with Perfect Home and Buy as You View having small but significant shares. All three companies have grown in recent years. Brighthouse, for instance, had a turnover of £351.7 million in 2015, an increase of 106% since 2009 (Brighthouse Limited. (2015). Brighthouse Limited – Report and Financial Statements (2014-2015). London: Companies House).
Who uses rent to own shops?
Rent to own shops offer high-cost credit which is typically used by high-risk and low income borrowers. Analysis of the Wealth and Assets Survey shows that people with rent to own debts are significantly more likely to have low incomes, dependent children, and to have disabilities with rent to own becoming an increasingly attractive option for financially vulnerable consumers.
How many people have rent to own debt problems?
As more people use rent to own shops, we have helped more people with rent to own debts. In 2015-2016, Citizens Advice helped people with over 11,500 hire purchase debt problems. This upward trend has continued into 2016/17. In the first quarter of this year, we helped people with 2,871 hire purchase problems, 20% more than in the same period last year.
Looking at the market more generally, large numbers of rent to own consumers get into financial difficulty.
What is causing these issues?
There are 4 main factors which lead to people developing issues with their rent to own agreement:
First, rent to own agreements are expensive. Rent to own companies often sell their products at inflated prices and charge customers for expensive, often mandatory add-on services, such as aftercare. That high cost is amplified by the high interest rates with APRs ranging between 68.9% and 99.9%
Second, rent to own companies conduct poor affordability checks. We found that a fifth of rent to own customers spend more than 20% of their income on rent to own agreements.
Third, when customers do get into difficulty, they can be treated badly. A significant number of people who come to Citizens Advice for advice on how to deal with their rent to own debts feel they are being harassed and more than a third of rent to own customers who get into financial difficulties aren’t able to arrange an affordable repayment plan.
Lastly, the agreements themselves are difficult to understand. In particular, the cost and value of add-on services mean it is difficult for consumers to compare prices between rent to own and high-street shops.
What can be done?
To help people avoid taking on unmanageable rent to own debts, our research makes a number of recommendations to government, regulators and rent to own lenders, including:
- The FCA should extend the total price cap on high-cost short-term credit to the rent to own market.
- The FCA should investigate how rent-to-own consumers can be encouraged to shop-around when buying add-on services. At the very least, consumers should be given a 14 day cooling off period after purchase in order to shop around for aftercare and insurance.
- Brighthouse should follow the example of the rest of the market and make their aftercare service optional. Alternatively, the CMA should investigate whether bundling the prices increases overall prices by limiting competition.
- The FCA’s affordability guidance should be applied as rules to rent to own lenders, as well as high-cost short-term credit lenders.