The Washington Post published an article recently about rental America and the concept of why the poor in this country pay $4,150 for a $1,500 sofa. Because poor people don’t have credit, cash, or bank accounts their shopping options are limited to places that come with high price tags and hefty fees.
Five years into a national economic recovery that has further strained the poor working class, an entire industry has grown around handing them a lifeline to the material rewards of middle-class life. Retailers in the post-Great Recession years have become even more likely to work with customers who don’t have the money upfront, instead offering a widening spectrum of payment plans that ultimately cost far more and add to the burdens of life on the economy’s fringes.
The poor today can shop online, paying in installments, or walk into traditional retailers such as Kmart that now offer in-store leasing. The most striking change in the world of low-income commerce has been the proliferation of rent-to-own stores such as Buddy’s Home Furnishings, which has been opening a new store every week, largely in the South.
In some ways, the business harkens back to the subprime boom of the early 2000s, when lenders handed out loans to low-income borrowers with little credit history. But while people in those days were charged perhaps an interest rate of 5 to 10 percent, at rental centers the poor find themselves paying effective annual interest rates of more than 100 percent. With business models such as “rent-to-own,” in which transactions are categorized as leases, stores like Buddy’s can avoid state usury laws and other regulations.
And yet low-income Americans increasingly have few other places to turn. “Congratulations, You are Pre-Approved,” Buddy’s says on its Web site, and the message plays to America’s bottom 40 percent. This is a group that makes less money than it did 20 years ago, a group increasingly likely to string together paychecks by holding multiple part-time jobs with variable hours.
Points to note from the article:
- At Buddy’s, a used 32-gigabyte, early model iPad costs $1,439.28, paid over 72 weeks. An Acer laptop: $1,943.28, in 72 weekly installments. A Maytag washer and dryer: $1,999 over 100 weeks.
- The article shows how despite not wanting to pay in installments, families like the one featured don’t have many other options. They can’t build up savings because it gets wiped out by daily needs and there are very limited plans for credit for low income earners. The industry also makes it seem like rent-to-own is their only option, and the resigned families go with it only later understanding that the choice has left them poorer than they started.
- The family featured in the article opted for a love seat and sofa that retailed for a total of $1,500. In over two years of payments the price if paid weekly would be $4,158.
- The family fell behind and stayed behind on their payment installments and had a $5 late fee rolled in each time.
- They also added smartphones and speakers to the bill and raised their payments.
- Those in the industry say they offer a legitimate service to an easy-to-overlook customer base. Customers who can’t make the payments face no penalty; because they start out as renters, not owners, they don’t face debts or credit damage if they make a return.
It does illustrate a huge problem in our country. It shows why the lack of financial education and literacy buries many people further and further behind. They don’t or can’t imagine the consequences of their financial actions and then they end up suffering because of it.
You would think that the math alone would stop people from walking into deals like this but unfortunately it doesn’t. It seems many get started and realize it won’t work with their budget to even handle those small payments – many items are returned and reposessed.
The fact that the family in the article struggled with the payments but then added additional “luxury” items to their tab seems absurd to someone like me. When I can’t afford something, I don’t buy it. You know how much my couch cost? ZERO. It was donated to me from a family member when they bought a new one. It’s also a couple decades old.
Part of me feel so sad for these people and others like them. When you are poor you are not given access to a lot of the same things that others are. You get ripped off by payment plans and late fees and a system set up to take as much from you as possible. You also have to live with constant stress of money problems. It’s something that plagues you constantly and the stress makes life so much more difficult and scary.
However, the personal finance blog writer in me thinks they almost deserve it. The lack of education is sad, but there is a basic common sense that tells most people not to buy things they can’t afford. You don’t need a smartphone if you don’t work. I understand the desire to have things others do so you feel normal, but sometimes you have to wait. Sometimes you sacrifice so you can have that stuff later.
The article is interesting and it’s worth a full read so hop over there and read the full story.