MPs and FCA may cap rent to own loans in 2018

2018 may bring changes to the rent to own loan industry. StepChange, the Big Issue Group as well as other charities are bringing attention to the high cost of using this type of credit to pay for items. Many of the rent to own lenders charge as much as, or more than, payday lenders did a few years ago, so the interest rates and fees are very costly. Both the Financial Conduct Authority  as well as MPs are being pressured to put caps on these lenders.

What are these loans and warranties?

Rent to own loans are used by families, often those on a low income or the vulnerable, to pay for items they need or want but that they do not have the up front cash to buy the product. So they turn to one of the lenders in the marketplace, such as the Cash Stop, BrightHouse, or the Morse Club among others to borrow the money they need.

These lenders in effect provide financing to the family so they can buy the item they need for their home or flat. It may be a television, washing machine, bed, sofa or other furniture. A rent to own lender can really provide credit to the borrower so they can pay for any type of item.

While the practice sounds good in theory, the loans are very costly as data in 2018 shows. The APR rates range from 69 percent at BrightHouse to over 700 percent at the Morse Club. Other lenders may charge their borrowers different interest rates, some of which may even be more expensive.

The cost to buy items using one of these loans can be extreme. According to The Financial Conduct Authority, there have been examples of someone needing to pay £2,000 for a washing machine (when adding in the interest and fees) and the original cost of the machine was only £300. So the family paid almost 700 percent more than it cost when adding in the fees.

Not only are the APR rates extreme, but some lenders are also making the buyer get a high priced warranty. This will also add to the cost of the purchase, as many warranties are pricey and are unnecessary.

Are rent to own lenders predatory?

There has been more attention brought onto this industry in 2017 and now 2018. Now that payday lenders have caps in place thanks to the Financial Conduct Authority (FCA), attention is being brought to companies such as BrightHouse and their high cost of credit.

StepChange has indicated to government MPs that these lenders are often targeting vulnerable families. This includes the illiterate, refugees, immigrants, older people and others who may not be fully aware of the cost to borrow money. They also may not understand the APR, fees, and costs of using a right to own loan.

Charities are asking a cap on the lenders in 2018 or later. The aim is 100 percent cap for a right to own loan with fees also cap and proof of repayment needed, which will be similar to what is being done for payday lenders. While even that type of APR will still be mostly to many families in the UK, it would be a big improvement over what is being done today.