By Jennifer Hunter, Ph.D., University of Kentucky Cooperative Extension Service
Payday loans and rent-to-own options are appealing to many families because payday loan lenders and rent-to-own storefronts are often able to offer you what you need quickly without much hassle. However, before entering into an agreement with either of these businesses, there are several important things that you should be aware.
Payday loans offer quick cash to consumers. In general, the requirements for obtaining a payday loan include that you have a job, bank account, and personal identification. A payday loan typically works the following way: the payday lender gives the borrower cash with a promise that the loan will be repaid in two pay periods when the borrower receives his or her paycheck. When the money is due, the borrower can choose to pay the lender in cash or to allow the lender to cash their check. Easy enough, right?
While there are pros to getting a payday loan including fast cash in and no required credit check, there are also many drawbacks. Many of the people who obtain a payday loan are unable to pay back the lender in the agreed upon timeframe. As a result, borrowers are often left with little choice but to take out more loans in order to pay back earlier ones leading to a significant amount of debt.
Rent-to-own stores allow consumers to rent a household item for a monthly cost that is usually much lower than what a monthly payment would be at a major retailer. These stores allow consumers to rent the item on a weekly or monthly rental. After completing payment over the term of the rental, the consumer then owns the item.
This option may seem particularly appealing to families who are in need of temporary furnishings. However, what rent-to-own stores often fail to inform consumers is that their rental periods are often longer and the buyer will end up spending much more than they would have if they had obtained a conventional loan or bought the item outright without any type of financing. Consumers often spend three to four times what the cash price would have been when all is said and done! Additionally, if a consumer were to choose to return the item before the rental agreement is completed, a fee is charged.
As an alternative to choosing the rent-to-own option, consider the following:
- Buy the item from a garage sale, consignment shop, or friend.
- Borrow the item temporarily from a friend or family member.
- Deliberately set aside money each month until you have saved enough to buy the item outright.
- Look into layaway plans at major retailers.
It is easy to see why so many families choose to take out a payday loan or rent-to-own household items. However, it is also easy to see why you should use caution when considering these options. In the long run, you will end up costing yourself a significant amount of money.
Keep in mind that payday lenders and rent-to-own stores are in business to make money. If you choose to take out a payday loan or rent-to-own a household item, do your research first so that you can make an informed decision. Do not be afraid to ask these businesses to clearly share their policies with you. After all, you are your own best advocate!
Watch the recording of our Predatory Lending Practices & How to Avoid Them webinar from July 2015 here.
Contact Jennifer at firstname.lastname@example.org