The Ins and Outs of a Vehicle Rent to Own Contract
A vehicle rent to own contract (VRTO) is emerging as an increasingly popular method of acquiring a car or truck. They are a hybrid between a lease and a purchase. Unlike a traditional lease, the rent paid under the VRTO is not rent, it is part of the cost of the vehicle. Once the individual has made all of the payments, no further rent is payable, and the person can own the vehicle. Like a lease , the seller retains ownership of the vehicle until the final payment is made. However, unlike a lease, the buyer has all of the risks of owning the vehicle, and must insure the vehicle and pay taxes on it.
VRTOs are becoming increasingly popular as people with challenged credit try to work around the distortions in the credit market that result from subprime mortgages. The basic elements of a VRTO are:
Benefits of a Rent to Own Contract
Opting for a rent to own agreement for your vehicle comes with plenty of advantages. First and foremost, the flexibility in terms. If you pay month-to-month and at any time feel like the vehicle isn’t worth the money you’re paying, then simply walk away. With a traditional car loan, you’re locked in, even if you’re upside down on payments or your needs have changed. Paying rent each month provides you with a comfortable level of freedom, as well as a sense of security in knowing you can return the vehicle if necessary.
Another important advantage is in establishing credit. If you’ve had trouble in the past establishing credit, renting to own can help build your credit while providing an excellent opportunity to put some money in your pocket. And while you’re establishing credit, you’ll be working toward vehicle ownership at the same time.
If you decide to purchase the vehicle after a few months, you’re already equipped with years of flexible payments that reduce the overall monthly payment. You have the option to pay the remaining balance at any time, without any early payment penalties. And, if you decide this isn’t the vehicle for you, simply pay rent until the end of the contract and be done with it. A traditional loan doesn’t offer any of these advantages.
Disadvantages to Be Aware Of
While vehicle rent to own contracts can be a good solution for many people, there are also some potential downsides. The biggest issue is that the overall cost may be higher than outright purchase of a vehicle. You will still have to pay sales tax as well as interest on your monthly payments. Interest rates for lease arrangements are often higher than for loans or financing since the lease company will likely be subject to more risk than the bank.
Some vehicle rent to own contracts include penalties for not completing the purchase of the vehicle. If you are aware that from the start that you do not wish to purchase the vehicle, be sure to choose a rental agreement without penalties. These penalties can be quite onerous and make the lease unattractive. You should also agree up front on what happens to any equity you have built depending on whether or not you complete the purchase.
In addition, the condition of the vehicle is a concern. As long as you keep the vehicle in top condition and avoid any problems, damage or excess wear and tear, you should be fine; however, if you experience a breakdown or damage after you have already made substantial payments, it may be tempting to stop monthly payments. If you default on the agreement, the lease company can repossess the vehicle without additional notice or recourse.
Remember, you entered into a legal agreement, and by signing your name you agreed to its terms. If you do not think you can handle the potential penalties or fees, consider another option rather than vehicle rent to own contracts.
Important Terms and Clauses to Consider
One of the first things you should look at when you’re considering a vehicle rent to own contract is the payment schedule. What you’re looking for is a regular payment plan that lists the payment amounts and due dates. Does it change at some point? If so, when, and how much?
Another critical thing to look for is the interest rate. The interest rate on your rent to own arrangement must be lower than the average credit card interest rates, or you could pay thousands over the life of the loan in fees. Also, some contracts assess an interest rate on the overdue balance, meaning you could actually end up paying late fees more than you would for the vehicle itself.
Next, check the contract for a maintenance clause. Make sure the contract states clearly whether the car is the renter’s responsibility or if the responsibility falls on the dealer. This is important since brake repairs, tire rotation, upholstery damage, all of these things can add up really quickly if you’re not concerned with them when you take possession of your vehicle.
Also, check the contract for a termination clause. You want to know what will happen if you need to get out of the contract before the term is up. Some of these arrangements could just as easily land you in bankruptcy court if you can’t manage the payments as they could help you get on the path to ownership by defaulting on the payments. These clauses are also important in case of total loss of the vehicle in a collision or a theft.
How to Identify the Best Rent to Own Agreement For You
When you are presented with a rent to own contract, don’t look at it the same you would a regular rental agreement. You will need to consider it as a potential financial investment. You can follow several steps to make sure that your investment is sound.
Can You Afford It?
Focus your attention on the purchase price of the vehicle after the term of the payment plan is complete. In several states, the consumer must pay sales tax on the full purchase price and not just the monthly payments. In other words, the contract is actually a lease with an option to purchase at the end of the term. If the total cost over the term of the contract and the sales tax governs the value of the vehicle, then consider whether you would be better off buying the vehicle outright.
Understand the Implications of Damage and Excess Mileage
You may find that the contract allows either the lessor or the lessee to adjust the payments according to the mileage you put on the vehicle . You may also be liable for damage and maintenance that causes a reduction in the vehicle’s value. These provisions continue a cycle of payments if you should end up owing more than the vehicle is worth and do not replace it on terms agreeable to both you and the seller.
Consider the Impact on Your Credit
You will have the credit rating of a leasee, and it may not be beneficial for your current financial situation. Some shoppers may only be able to afford the payments on a purchase, but the purchase may be too large for your financial situation. In some cases, you may have the opportunity to reduce the down payment and monthly payments for a lease. Some sellers will function as a leasing alternative while still allowing you to pay cash for a vehicle. As with any other leasing contract, you will pay interest on the cost of the vehicle and anything else that is included in the contract.
The Legal Vulnerabilities and Protections
While Texas law provides for vehicle rent to own contracts, the primary vehicle for installment sales in Texas remains the motor vehicle retail installment contract. This name is somewhat of a misnomer as "retail installment contract" is not the technical name under Texas law but rather an industry term. The technical name under Texas law is "motor vehicle time sale contract" (insurer not to be confused with any insurance offered). Under that contract type, the buyer has the option of returning the vehicle at the end of the term. These contracts are preferred by many dealers, consumers and lenders largely for their consistency under Texas law as well as for available forms of protection.
Under the motor vehicle retail installment contract, the buyer is allowed to make monthly payments over a period of time that are tied to an implied financing charge (often called an interest rate or Annual Percentage Rate). For each payment that is missed, the buyer (or lender) has the right to repossess the vehicle by taking physical possession. The right of repossession is set forth in a statutory framework under Chapter 9 of the Texas Business and Commerce Code as well as a closely related section of Chapter 9 of the Texas Uniform Commercial Code.
Chapter 9 of the Texas Uniform Commercial Code provides for certain protections to both consumers and lenders. For example, in Texas repossession cannot be done by "self help." Instead the repossessing party must act within the law, claim rights to repossess the vehicle, avoid a "breach of the peace" and may have reporting obligations under Chapter 9 of the Texas Business and Commerce Code. Compliance with such requirements is essential. Failure to comply can result in loss of rights of repossession or liability for damages or both. While a lender or dealer may have a right of repossession under Chapter 9 of the Texas Business and Commerce Code, the contract terms should always be reviewed with an attorney to determine whether other execution, reporting or sale provisions are compliant with the law.
Which Types of People Are Best Suited for a Rent to Own Option?
Consumers who can benefit the most from a rent to own vehicle contract are typically those who may have had past credit problems, find traditional financing difficult to qualify for, or have limited savings to purchase a vehicle outright. Also, a person who may have a volatile income, such as a college student, contract worker, or commission-only sales person, may benefit from the option of making lower payments now and paying off the balance later on average if he or she decides to purchase the vehicle . The ability to purchase at any time over the contract term also allows the consumer to make payments and see whether the vehicle is a good fit, without losing any funds already expended. Therefore, it makes sense to offer a rent to own contract to a consumer who may need the flexibility to make payments or otherwise purchase a vehicle. Such flexibility will definitely be appreciated by a consumer who finds the traditional car-buying process stressful or overwhelming.