An Economic Investigation of Rent-to-Own Agreements

Rent-to-own (RTO) allows immediate access to goods without a credit check and provides an opportunity for eventual acquisition. Yet goods can be returned at any point without penalty or other adverse financial consequence. RTO is attractive to financially distressed consumers due to its ready availability as well as the options embedded in the contract. These options include the ability to cancel, early purchase, reinstate following a consumer return, and, possibly, choose the frequency of payments.

In this article, a body of research on RTO is brought together and summarized. The bulk of this work is empirical, applying statistical techniques to examine thousands of finely detailed records of individual transactions. The primary focus is to explore the nature of the contract—for example, what is being rented, how the contract evolves over time, and what is the ultimate outcome. The intent of this exploration is a better economic understanding of the RTO financing mechanism as well as a contribution to the ongoing policy debate surrounding such subprime lending.