Rent-to-Own Car: How the Process Works

A rent-to-own policy allows you to rent a car for a period of time and put a portion of the rental payments toward buying the car. This strategy can help people with poor credit histories purchase a vehicle as there are typically no credit checks. You usually just have to prove your identity and income.

However renting to own does have downsides to consider, including high costs and, in most cases, no warranty.

Good Credit vs. Bad Credit

Interest rates for car loans, like with most financing, are lower for those who have strong credit and higher for those with poor credit.

If you have a lower credit score and a higher interest rate, you will face higher monthly payments and a higher overall cost of the car. Many people with bad credit may not even qualify for traditional financing.

Let’s look at a hypothetical example that compares the terms for a five-year, $20,000 car loan for someone with good credit who qualifies for 4% and someone with poor credit who qualifies for 15%.

The monthly payment on the loan would be $255.37 with a 4% interest rate and $475.80 with a 15% interest rate. The borrower with a 4% rate would pay a total of $2,099.83 in interest over the life of the loan and the borrower with 15% would pay a total of $8,547.92.

What Is Rent-to-Own?

Rent-to-own deals allow you to get a car without requiring a credit check. This makes it much easier to qualify for if your credit is poor. Generally even a subprime loan requires a credit check. All you need to show is proof of identity, residence, and income.

How Rent-to-Own Works

With rent-to-own cars, payments are often made on a weekly rather than monthly basis and will depend on the price of the car. You'll probably also need to make a down payment.

The rent-to-own process is similar to leasing a car, except that all or a portion of the payment goes toward a purchase price, and you can own the car at the end of the period.

Generally, you make payments directly to the dealership. If you purchase from a large chain, payments may be managed using a national bill-paying service. There is usually a fee for late payments, such as $25.

Car dealers that offer rent-to-own options usually cater to the subprime market. They tend to sell used cars that are mechanically sound with higher milage. They sell these cars for a significant market up. That base price is how the rental price amounts are determined.

Rent-to-Own vs. Subprime Loan

Rent-to-own programs and subprime loans are two ways a borrower with poor credit history can own a vehicle, but they have some key differences.

A subprime loan is a loan made to borrowers who cannot qualify for traditional loans. Because these borrowers are higher risk, lenders charge more in interest.

With a rent-to-own program, you do not initially own the vehicle. Instead, a portion of your payments go toward the cost of the car. With a subprime loan, you receive funds from the bank to use to buy the car. Then you own the car and make regular payments toward repaying the loan.

Rent-to-Own Versus Leasing

Leasing is another option to get a car, although you will not own the vehicle. And this option still may not make sense if you have bad or no credit.

With leasing, payments are cheaper than financing a vehicle, and you can change your car every three or four years, depending on the term of your lease.

Leases are basically contracts to rent the car for a certain length of time. You pay for the depreciation of the vehicle plus interest and fees each month. Once you reach the end, you have the option of buying it out or leasing another vehicle.

Advantages and Disadvantages of Rent-to-Own

The benefits of getting a car through a rent-to-own program include:

• Ownership: At the end of the rental term, you own the vehicle. Check whether you first need to make an additional payment before you own the car.
• No Credit Checks: A credit check is not required. Consider asking the dealer to report your payment history so you can build a better credit history as you make on-time payments.
• No Interest: You're only paying the rental fee, which goes all or in part toward the purchase price. But keep in mind, you're probably paying the dealer markup on the car price.

Downsides with rent-to-own programs include:

• Overpriced Cars: Rent-to-own cars are usually marked up more than other used cars.
• Frequent Payments: You pay back the loan weekly or bi-weekly instead of monthly. Having to make more payments a year can make it easier to miss a payment and incur a late fee.
• No Warranty: Typically, there is no warranty on a rent-to-own contract. So if the car breaks down the week after you sign the contract, it’s your problem to fix.

Payment Distribution

Be sure you understand how much of your payment will go toward ownership of the car and how much toward rental. Also, you may owe more money at the end of the rental term if you want to purchase the car. Get the purchase terms you want in writing before you rent.

Early Termination

Review your rent-to-own contract regarding terms for potential early termination fees. For example, if you find the car needs a lot of repairs, you may decide that you don’t want to own the car and would like to end the rental.

Depending on the terms, you could lose your down payment and any money paid toward the purchase of the car. 

The Bottom Line

A rent-to-own car deal may not save you money, but it may be a viable option to buy a car if you have poor or no credit history. Determine your monthly budget and goals, and consider all your options for getting a vehicle, including leasing, before you commit to a decision.