Rent-to-own cars: Are they a good idea?

Woman sitting in her car, looking out the window, thinking about looking for a rent-to-own car.Image: Woman sitting in her car, looking out the window, thinking about looking for a rent-to-own car.

In a Nutshell

When you rent to own a car, you make frequent payments toward a used car that you’ll own at the end of your rental agreement. Since rent-to-own cars generally don’t require a credit check, this can be a good for someone who needs a car but has less-than-stellar credit. On the other hand, rent-to-own cars could come with high interest rates, and your vehicle selection may be narrow.
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If you need a car but don’t have great credit, a rent-to-own car could be a good option. These cars generally don’t require a credit check.

With a rent-to-own car, you’ll make payments to the car dealership. If you make all your payments, at the end of your rental agreement you’ll own the car. Getting approved for rent-to-own financing is generally easy — regardless of your credit — and you’ll own your car at the end of your rental period. But the car you get probably won’t be under warranty, and renting to own might not help you build your credit.

Let’s take a look at some considerations to help you decide whether a rent-to-own car is the best choice for you.

How vehicle rent-to-own works

With a rent-to-own car, a portion of your car payment goes toward buying the used vehicle at the end of your rental period, also sometimes called the lease period. Rent-to-own dealers often work with car buyers with low credit scores or a spotty credit history — and they usually don’t run credit checks. Qualifying for financing usually requires proof of regular income and residence. Rent-to-own dealers may also require a down payment.

Payments on a rent-to-own car are made on a weekly, bi-weekly or monthly basis, and they often go directly to the dealership versus to a third-party lender such as a bank.

How are rent-to-own cars different from leased cars?

The biggest difference between a conventional lease and rent-to-own cars is ownership at the end of the lease period. With a rent-to-own car, you’ll usually own the car once your rental period is up. But when you lease a car, you’re basically renting the car for only the length of your lease term. You pay monthly for the car’s depreciation, plus interest and fees. At lease end, you don’t own the vehicle, though you can usually choose to purchase the car, start a new lease on a different vehicle or walk away altogether.

Unlike most rent-to-own cars, leasing a car requires the dealership to run a credit check. Your credit can determine whether you get approved for a lease, as well as what your monthly payment will be.

Is a rent-to-own car a good idea?

Getting a car through a rent-to-own program can come with advantages — such as no credit check — and drawbacks including high interest rates and no vehicle warranty.

Pro: You own the car at the end of the rental period

With most rent-to-own car programs, your payments add up to a vehicle that you own outright at the end of the rental term. If you decide to go with a rent-to-own dealership, make sure you understand what will be required for you to complete the program and buy your car.

Pro: No credit check

Rent-to-own dealers usually don’t run a credit check, so you’re likely to get approved for financing, regardless of your credit scores or credit history.

Con: More-frequent payments

Depending on your payment schedule and the terms of the rental agreement, you may have to make frequent payments to the rent-to-own car dealership. Instead of monthly payments, you may be required to make payments on a bi-weekly or even weekly basis, which can be difficult to manage, depending on your pay schedule. Keeping tabs on more-frequent payments could also make it harder to avoid late fees or missed payments.

Con: Older cars with no warranty

With a rent-to-own car, your selection will be limited to what’s on the dealer’s lot — typically older vehicles with higher mileage that no longer have a warranty. If something goes wrong with the car once you’re under contract and the vehicle isn’t under warranty, repair costs would have to come out of your pocket.

Con: High interest rates

The interest rates and other fees you’ll pay will vary depending on the dealer, but a rent-to-own contract can come with high interest costs.

Con: You might not build your credit

When you lease a car, your payment history is reported to the credit bureaus, which affects your credit scores. But this isn’t always the case with rent-to-own cars, which means making on-time payments might not help you build your credit.

Alternatives to rent-to-own cars

If you don’t want to go the rent-to-own route, you may still have options.

Subprime auto loan

Some traditional banks, credit unions and online lenders provide subprime auto loans for people who have less-than-perfect credit (“subprime” is way of describing loans for borrowers with below-average credit scores). Just keep in mind that while you may have a better chance of approval with these lenders, subprime loans usually come with much higher interest rates, driving up the cost of financing.

Get a co-signer

A co-signer could be a family member or friend who agrees to pay back your loan if you don’t. A co-signer with good credit could increase your odds of getting approved for conventional auto loan and may even help you get a better rate.

Save for a down payment

If you can wait, take some time to save money for a car down payment. A down payment can help increase your loan approval odds and might even lower your auto loan rate.

Buy from a private seller

If you have some cash on hand, buying an inexpensive used car outright from a private seller or car auction could allow you to avoid financing altogether.

Ask an expert about rent-to-own cars

Meet the expert: Brian Moody, executive editor for Autotrader and spokesperson for Kelley Blue Book, has more than 12 years of experience as an automotive journalist.

What are some positives of rent-to-own when buying a car?

“Rent-to-own can help someone who needs a very low monthly payment and doesn’t have much money for a down payment. It’s also good for those with really bad credit.”

What are some drawbacks of rent-to-own?

“In the end, rent-to-own will likely cost more because the dealership is carrying the loan. Often the interest rates are high, and the dealership will only have a certain number of cars that are rent-to-own eligible. Buy-here, pay-here is another way to describe this method of selling cars.”

Would you personally recommend a rent-to-own vehicle?

“No. Rent-to-own or buy-here, pay-here are only for extreme situations. For example, let’s say you have a recent bankruptcy and have a new job lined up, but you just don’t have $2,000 for a small down payment. Similarly, if you’re a new arrival in this country or don’t have an established credit history, it can be a good way to get a start. Buy-here, pay-here can be really flexible. If you have just ‘kind of bad’ credit, try to get a more traditional loan or look for a car where you can afford to pay cash.”

Next steps

Before deciding on a rent-to-own car, be sure to look into all of your options for buying a vehicle. Shop around for lenders or credit unions that specialize in bad credit auto financing, and compare the cost of a traditional auto loan against the cost of a rent-to-own deal to help determine the better choice. Our auto loan calculator can help.

If you decide to rent to own, be sure to read the contract carefully and make sure you understand all of the terms, including how much of your payments will go toward owning the car and any fees you might incur, such as late-payment fees or license and title fees to obtain ownership of the car at the end of the rental period.

About the author: Sarah Sidlow is a freelance writer and editor based near Detroit. She has a master’s degree in journalism from Georgetown University. Sarah’s work has appeared in Luxembourg’s national newspaper, Washington City Paper… Read more.