'Rent-to-own’ price cap planned - but households could still pay DOUBLE the cost of products in fees and interest

22 November 2018

Rent-to-own retailers face a price crackdown after the financial watchdog proposed a cap on this type of high-cost lending. 

The move is designed to protect vulnerable households who face costly fees for buying household products. 

The Financial Conduct Authority (FCA) first said it would explore options on a cap in May.

Now it says that the cap will be set so that credit charges cannot be more than the cost of the product. 

In effect this means that shoppers can’t be charged more than 100% above the actual value of the product they buy.

While this is still a very expensive way to buy, the FCA says it will save consumers up to £22.7 million a year.

Rent to own stores such as Brighthouse allow households without the money to pay upfront to buy items and pay for them in installments. For some people this allows them to buy essential goods that they might struggle to buy upfront or find credit to purchase elsewhere. It breaks down costs into manageable monthly amounts. 

However, the industry has faced criticism for offering high interest costs that can more than double the amount that some customers pay back for items. Extra costs such as insurance and installation costs can also push up prices. It means the poorest households can end up paying the most to buy household goods - a situation known as the poverty premium. The cap will cover all fees, interest and other charges. 

According to the watchdog, rent-to-own (RTO) purchasing is most used by low-income households as a means to obtain expensive items such as televisions and white goods.

Typically, customers of RTO earn between £12,000 and £18,000 per year and are often likely to have missed bill payments in the past six months.

RTO retailers will also be forced to benchmark their product prices against three other retailers by the new rules. Rules will also be introduced to ban firms from selling extended warranties for products at the point of purchase, with a two-day cooling off period.

Andrew Bailey, chief executive of the FCA says: “Today’s measures are designed to bring down very high prices in the rent-to-own sector, which is used by some of the most financially vulnerable in our society.

“A cap will prevent firms charging over the odds for essential everyday items like cookers or washing machines. We believe a cap is the only intervention that will effectively tackle the highest prices.

“We want to stop consumers having to pay many multiples more than the price of a product on the high street. These changes build on the measures we have already taken across the high-cost credit sector.”

How to avoid rent-to-own

Rent-to-own pricing models are a tempting way for many to purchase expensive items, as it spreads the cost into manageable monthly payments. But in reality, it makes the cost of such products significantly higher.

Here are some tips on how to avoid resorting to these kinds of deals:

1. Think about whether you really need to buy it. Often an expensive purchase, such as a cooker or fridge will be unavoidable as they are an essential household item. But others such as the latest big-screen TV or games console are not, so think about whether you can do without.

2. Save up to pre-empt emergencies. Moneywise will always recommend in the first instance to try and squirrel away money for a big purchase, or even to have a rainy-day savings fund in case an appliance breaks unexpectedly. This can, though, be easier said than done. Schemes such as the governments Help to Save come with very generous bonuses of up to 50p for every pound saved.

3. Use a 0% purchase card. While credit cards are not cheap ways to spend, you can apply for a card that comes with a 0% purchase rate over a set period. This is a great way to make a big purchase that can then spread the cost over a fixed period of time. Check our guide to the best 0% purchase cards for more. Always use a credit card affordability checker before you apply as a rejection will harm your credit rating.

4. Try your local credit union. Credit unions can often have cheaper ways to borrow cash, and will often help people who don’t have the best credit ratings. Check websites such as findyourcreditunion.co.uk to track down your nearest provider.

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