Renting a Hyundai Accent from your local car rental company for $190 a week doesn't rile up consumer advocates. But make a large-screen TV available for rental for $46 a week, along with an option to buy it, and you're charged with unconscionably preying upon the poor.
That's the problem Rent-A-Center
Without those litigation charges and expenses related to restructuring, Rent-A-Center would have reported earnings of $35.6 million, compared to the $33.6 million in adjusted earnings a year ago. While that would have meant flat earnings year over year, it would have been slightly better than the $0.49 per share analysts had expected.
Renting to own furniture, equipment, and appliances is not the most financially astute thing to do. Because the rental payments also include a portion set aside to defray part of the cost of the goods, you end up paying a lot more for the merchandise than you would if you just went to Sears
But that's just the thing. People who use the services of Rent-A-Center or Aaron Rents
The people using Rent-A-Center are being given immediate access to household goods and products at low rates, usually without any down payment or credit check. Not that the rent-to-own industry has these customers at their mercy. There's no right or privilege to owning a large-screen TV.
Yet it can't be denied that the rates charged by the companies over the course of the contract are, um, excessive. In the lawsuit that caused Rent-A-Center to set aside that large sum for "probable" losses, the court found that the interest on the contract exceeded 80% per year in some cases. That's obviously far above the 30% cap set by New Jersey law.
Rent-A-Center argued that its contracts were leases that didn't fall under the state's usury laws. Since there was no obligation to buy the products -- the plaintiff could simply walk away from the rentals by stopping payment and returning the products -- it did not constitute a retail installment contract. The state supreme court disagreed. Between 64% and 70% of Rent-A-Center's customers ultimately buy the product.
The rent-to-own industry, like payday lenders and subprime mortgage lenders, has a somewhat unsavory public persona. Rent-A-Center has encountered similar lawsuits elsewhere, forcing it to change its practices to comply with the law. That creates a lot of uncertainty now, and regardless of rising revenues, you can expect more legal challenges built upon the rulings in New Jersey.
For more on rental businesses, check out:
- Rent-A-Center Revs Up: Fool by Numbers
- Aaron Ups Its Rents: Fool by Numbers
- Rent-A-Center Buys Growth