Rent-to-Own Car: What Is It?

Rent-to-own car deals are agreements that allow you to rent a car with the option to purchase it at the end of your term. These programs are often more flexible than traditional financing options and can be a good fit if you do not qualify for a regular car loan due to a lack of credit history or a low credit score.

Choose a car from a dealership that offers rent-to-own programs and agree to make regular payments over a specified period. A part of these payments then goes towards the eventual purchase of the car. But, most dealerships will require a down payment upfront, in addition to your regular monthly, weekly, or bi-weekly payments. This initial payment, along with your regular installments, is added towards the final purchase price of your future vehicle.

However, just like any financial commitment, rent-to-own car deals come with their own set of considerations. If you don't want to buy the car at the end of your term, you'll lose all the extra money you've paid toward the purchase. Therefore, be completely sure about your decision to eventually own the car before entering into such an agreement.

A subprime loan is a type of loan that is offered to individuals who have poor credit scores—typically a score below 670. The exact threshold can vary among lenders. The sole characteristic of a subprime loan is that it has a higher interest rate compared to prime loans, which are offered to borrowers with better credit scores. These interest rates reflect a higher risk that lenders take when handing out loans to less creditworthy individuals.

But subprime loans are not only about higher interest rates. Be aware of additional fees and penalties, which can make the overall cost of your loan significantly more expensive. These can include prepayment penalties, which are charges for paying the loan off early, as well as so-called balloon payments—a large payment due at the end of the loan term.

Despite all of the fees and higher rates, subprime loans do serve a good purpose. They provide any individual with poor credit history an opportunity to get financing, which they might not have been able to get otherwise.

Rent-to-own programs and subprime loans are two good ways for individuals with poor credit history to finance a car. However, there are differences. 

A subprime loan is specifically designed for those who might not meet the eligibility criteria for a traditional loan. Due to the risk associated with these borrowers, lenders tend to offset this by charging higher interest rates.

A rent-to-own program doesn't immediately grant you ownership of the vehicle. Instead, part of your payments goes towards the eventual purchase of the car. In contrast, a subprime loan involves the bank providing funds upfront for the purchase of the vehicle. The borrower then owns the car outright and makes consistent repayments to settle the loan.

Another popular car deal agreement is 'lease-to-own', also known as a lease purchase. With a lease-to-own car deal, you're committing to purchasing the vehicle at the end of your lease term. The payments you make over the agreement's duration partially contribute towards the final purchase price. At the end of the lease term, you're obligated to buy the car by paying any outstanding balance.

The main difference between rent-to-own and lease-to-own lies in the obligation to purchase. If you picked the rent-to-own option, then you don't have to buy the car at the end of your term. Whereas in a lease-to-own agreement, your purchase is mandatory.

If you find yourself between these two options, consider your financial stability, credit score, and long-term car needs.

Alternatively, you can use a FINN car subscription to select the car and corresponding terms you want. If you need some time to consider your options, improve your credit, or do some additional research, FINN offers you all the flexibility you'll need. With dozens of brands to choose from, you could end up test-driving the car you want without ever having to enter into a lease-to-own car program. 

Rent-to-own car deals can be a good alternative to traditional financing or outright purchase, especially for those with limited financial resources or a poor credit history. However, like any financial decision, it comes with its own set of pros and cons, so take a closer look at the following list before making any big decisions:

Pros of rent-to-own car deals

• No credit check required: Rent-to-own car deals often don't require a credit check from you, making it a great option if you have a poor or no credit history.
• Potential for ownership: At the end of your rental agreement, you have the opportunity to own the car.
• Direct payment to car dealer: Rent-to-own agreements typically involve paying the car dealer directly, which can simplify the process.
• Lower upfront costs: Unlike traditional financing, rent-to-own deals likely require lower upfront costs, which can be good for those on a tight budget.

Cons of rent-to-own car deals

• High interest rates: One of the big cons of rent-to-own car deals is the high interest rates. The rate can vary depending on the car dealer, but they're often considerably higher than what you would pay with traditional financing.
• Risk of overpayment: Given the higher interest rates and additional fees associated with rent-to-own contracts, there's a risk of overpaying for the car.
• Loss of car: If you miss one payment, you can lose the vehicle. Because of that risk, you really need to understand your financial situation before signing a rent-to-own agreement.
• Limited options: Rent-to-own car deals often come with limited options in terms of make, model, and features. Dealerships may only offer certain vehicles under these agreements.

Rent-to-own car programs are often targeted toward buyers with poor credit scores or inconsistent credit history. These car dealers usually don't run credit checks, which can make the process more accessible if you struggle to secure traditional financing.

You should keep in mind that these agreements do not save you money. The overall cost is usually higher due to higher interest rates and additional fees. Plus, these agreements typically require a down payment, followed by regular payments, making budgeting a big part of this process. Make sure that these payments align with your financial situation.

From another point of view, rent-to-own car deals can offer you the advantage of 'test-driving' the vehicle for an extended period before committing to purchase. This can come in handy if you're unsure how the car will fit your needs and lifestyle.

While rent-to-own car deals offer a path to vehicle ownership for those with low credit scores or spotty credit history, they may not always be the most cost-effective choice. It's good to explore other alternatives that could potentially offer more flexibility and affordability.

• Traditional car rentals: Traditional car rentals offer a straightforward option for those needing a vehicle for a short period.
• Peer-to-peer car rentals: Platforms like Turo and Getaround allow you to rent cars directly from their owners, often at competitive rates.
• Rideshare rentals: Rideshare companies like Lyft now offer rental services, providing another flexible alternative for short-term car use.
• Car sharing services: Zipcar is a popular car-sharing service that allows members to rent cars by the hour or day.

Car subscriptions: A new concept in the automotive industry is the car subscription model. Companies like FINN offer a flexible alternative to car ownership, where for a monthly fee, subscribers get access to a car, along with insurance, maintenance, and roadside assistance included.