Are you paying too much for your rent-to-own fridge?

What type of fridge would you expect for £1,100? Some souped up high end American model? Well according to our Money Saving Expert Martin Lewis, 400,000 families in the UK risk paying that for a bog standard fridge that costs everyone else £300 because they buy through rent-to-own.

What is rent-to-own?

It is a way for people to buy household items like fridges, cookers, washing machines, without having to pay for the cost upfront. Instead, they pay a fixed amount each week or month for between one and three years. At the end of the time they then own the product.

The big players in this market are BrightHouse and PerfectHome – they operate online, and in stores. The regulator the FCA announced last month that it is considering introducing a cap on rent-to-own costs – similar to the cap on payday loans.How does it actually work and what does it cost?

This is a true poverty premium, with many of the poorest in society paying far more than everyone else for their goods. Let me give you a couple of examples to explain.

Your washer-dryer has broken down and you need a new one. Go to PerfectHome and its price for an Indesit 5KG washer dryer is £596. Yet you could buy the same on Amazon for £320, so even the base price is not far from double what it needs to be. You’d then be charged a 69.8% representative APR – a huge amount, over three times the rate of a typical high street credit card. Repay over 1 year and you repay £14.83/wk so £771 in total, repay over 3 years and you repay a total £1,193 for a washing machine you could buy straight for £320. That’s almost four times the cost.

And this isn’t a one off example, it usually works this way with all the firms.

Buy a Samsung 60cm fridge freezer from BrightHouse, and its base price is £534 yet you could buy it at John Lewis for £469. Then it has a 69.9% rep APR which means repay over 3 years and it’d cost you £1,170.And remember these are representative APRs meaning only 51% of accepted customers need to get them, the rest can be charged MORE!

And on top of that they will try and sell extended warranties that can be hugely expensive – for the washer dryer above you’d pay more than £1 a week extra, so £173 over 3 years, and for the fridge freezer you’d pay £2/wk, so £312 over 3 years. The FCA is considering a ban on firms selling these add-ons at the point of sale.

Fail to keep up repayments and you’ll be charged fees of around £10-£12 or have to return the item. And get nothing back in return.What alternatives are there for people?

This is the problem. Let’s be honest, many of the people using these firms feel they have few other options – as they have poor credit scores and other forms of credit are not available to them. It is why the reduction of the social fund loans from the state that used to be available has caused many problems. Budgeting loans may be available from the government if you’ve been on certain benefits for at least 6 months – but you can only use it for certain things and there are tight criteria on who can get them.

Obviously the best thing is not to borrow but to save up to buy things, yet if you’re stuck in a rut and need something (need means a real pressing need not just a want) here are other things you can try.

  • Can you get it free or second hand? Try Freecycle and Freeglewhere people give things away to those in their locality. Or see whether there’s something reasonable available second hand. Ask family and friends too.

  • 0% poor credit credit cards. Not easy but use an eligibility calculator to see what cards you can get. Those with good credit scores can get over two years 0% borrowing. Most with poor credit scores won’t get anything. Though there are cards like Aqua which offers some poor credit scorers 6 months 0% then 34.9% rep APR afterwards. So this could be used for small purchases if you try and clear before the six months ends. Yet while I normally rant about a 34.9% rep APR, in this context, staggeringly it is still better than high APRs with rent-to-own.

  • A credit union. A credit union is a community savings and loans provider – but you can’t just join any. You’ll usually need to qualify eg, live in the area, or be part of a profession.Loan rates here are capped at 3% a month (42.6% rep APR). Typically you need to be a member with a credit union, and have saved with them first before you take out a loan through the union. Though not always, check with them first. Use Find Your Credit Union website.

You can also use the credit union loan to buy white goods via Co-operative Electrical - this scheme's offered through more than 100 credit unions, so ask yours if it participates – and the prices are pretty competitive, though always check the base price yourself. There’s also other non-profit firms Smarterbuys and FairForYouwhich may be a more competitive form of rent-to-own, but again always check how the cost of the goods compares to buying direct and how the APR compares to rent-to-own.

  • Any credit card. A typical credit card rate is 18%, a bad one 34%. Both of those are better than rent-to-own – provided you make the same repayments and are disciplined to pay it off (keep borrowing longer and you’re in trouble). Plus this means you will be able to buy the item yourself which is usually at a much cheaper rate than rent-to-own.

For example even at 34% APR, if you bought the washer dryer at Amazon’s price and repaid over 3 years it’d cost you £487 compared to £1,193 with the rent-to-own scheme.