Bad credit may hinder your ability to secure a reasonable auto loan to buy a car. Instead of taking out a sub-prime auto loan, you have the option of entering an agreement for a rent-to-own car. By putting a down payment on a car and making weekly rent payments, you can walk away with the car at the end of the term. Before you enter such an agreement, investigate the dealership to ensure it is legitimate, test-drive the car and -- if possible -- have it checked by a mechanic you trust.
How It Works
Identify a credible dealership offering a rent-to-own program. Check review sites, such as Yelp or Edmunds, to research a dealer's reputation. Visit the dealer's lot and select the car you want to buy. You'll sign a rent-to-own agreement that'll specify the car's price, down payment, schedule of payments and the term. Payments typically range between $75 and $100 while the term can run from two to three years, according to Auto Rental News. A missed payment doesn't raise interest costs but will incur a late fee. The dealer will install a payment device -- an electronic starter interrupt -- in the car. Once you plug in the code, you can start the car and use it for a week. If you fail to make a payment, this device shuts the car down.
Pros and Cons
The advantage of a rent-to-own program is that you can buy a car without a credit check. The payments are not only fixed but most of the money is applied toward the purchase of the car. However, you'll pay much more for the car than it's worth. In general, rent-to-own cars are picked up at auctions for between $5,000 to $6,000 and are marked up at double the wholesale price, according to Auto Rental News. The dealer also tacks on an origination fee. The dealer's goal is to reap more than 100 percent gross profit on the vehicle over the rental term. In addition, if you make your payments on time, it doesn't bolster your credit rating. On the flip side, if you walk away from the agreement, it doesn't further erode your credit.
Because rent-to-own contracts don't include warranties, purchase an outside warranty to protect yourself in case the vehicle breaks down. To take possession of the vehicle, you'll need auto insurance at the end of the term. Be aware of the effect of the starter interrupt device, which can make you feel as if you're being surveilled and tracked. If you miss a payment, your car can shut down at an inconvenient moment if not in the middle of an emergency, according to "The New York Times." You'll typically get a few days of leeway to make a payment before the device shuts your car down.
Precautions Worth Taking
Always negotiate the sale price of the vehicle, checking on the true value of the car before you sign a rent-to-own agreement, so you don't pay more than is necessary. Review the agreement for mistakes in the numbers and the terms. Use CarFax and Autocheck to view the car's history. Title-washing is a common scam in which a salvaged vehicle is sent to another state that doesn't acknowledge the salvage brand, according to BusinessInsider. Also get a free CarFax odometer check and see if the mileage on the car's odometer matches its maintenance records.
- Go BankingRates: Is a Rent-to-Own Car a Good Option for Those With Bad Credit?
- Auto Rental News: Rent to Own: A New Way to Reach the Subprime Market
- Auto Dealer Monthly: Rent-to-Own Pays Off on the Bayou: Independent Dealer Successfully Switches Business Plan
- Forbes: People with Bad Credit Can Buy Cars, but They Are Tracked and Have Remote-Kill Switches
- The New York Times: Miss a Payment? Good Luck Moving That Car
- Business Insider: 21 Tricks Used by Devious Car Dealers
- Edmunds: New & Used Car Dealer Reviews & Dealer Ratings
- U.S. News and World Report. "Average Auto Loan Rates in April 2020." Accessed May 1, 2020.
Kay Tang is a journalist who has been writing since 1990. She previously covered developments in theater for the "Dramatists Guild Quarterly." Tang graduated with a Bachelor of Arts in economics and political science from Yale University and completed a Master of Professional Studies in interactive telecommunications at New York University.