Rent to Own
The Washing Post just put out an interesting article, “Why the poor pay $4,150 for a $1,500 sofa.”
I want to start by saying, I feel awful for this woman and her family. I grew up in a family that ranged from upper middle class to lower middle class over the years, but I’ve never had to worry about being able to afford to eat, or keep the lights on, or any of the basic necessities.
What I do want to discuss though, are the decisions we make and the consequences they have. The Post really explores the boom of the rent-to-own market through the eyes of a single family in order to explore the fact that our economy seems to have left the bottom quartile out of the recovery.
I believe this is all true. Our safety net is weaker than it was in the past. The minimum wage and the average wages of the more marginal parts of our society have stagnated for decades. I don’t necessarily have any solutions for our greater economy. However, we can explore some how individual decisions can significantly affect our position, whether at the bottom, top or middle.
The love seat and sofa that Jamie Abbott can’t quite afford ended up in her double-wide trailer because of the day earlier this year when she and her family walked into a new store called Buddy’s. Abbott had no access to credit, no bank account and little cash, but here was a place that catered to exactly those kinds of customers. Anything could be hers. The possibilities — and the prices — were dizzying.
Abbott wanted a love seat-sofa combo, and she knew it might rip her budget. But this, she figured, was the cost of being out of options. “You don’t get something like that just to put more burden on yourself,” Abbott said.
But when Abbott did her shopping in February, she didn’t have the money to make even a small lump-sum payment for anything of decent quality, even on Craigslist.
The love seat and sofa retailed, together, for about $1,500. Abbott would pay for hers over two years, though she still had paying the option to pay monthly or weekly. The total price if paid weekly: $4,158.
When I graduated from college, I did not own any real furniture. I was able to get a tiny table and 2 chairs for free from a friend who was throwing them out. They were total junk and falling apart, but I bought a $5 table cloth and hid how ugly that table was. Craigslist provided 2 couches for about $50 each. They were also super old and ugly, but they did the job. I’ll admit, I just kept the bed, I got from my parents (so it was free), but we’re talking about a 20 year old mattress and a bed frame. That was pretty much all the furniture I had for the first year. Even if I’d bought the rest Craigslist, it could have all been done for under $300.
We outfitted my girlfriends apartment in a similar matter and I think it also cost total about $400 for couches, table, and chairs. And while none of these things were nice, they were acceptable. This doesn’t even begin to address the free section on Craigslist. I searched “couch” under free and came up with 10 decent looking ones on the first page. It is insanity for this family to spend even $1,500 cash on these couches in their income bracket, let alone the total of $4,000 over time.
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.
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.
Should this be legal? I really can’t decide and feel quite conflicted. It seems that if the terms are clear and understandable and everybody is entering the contract willingly, then so be it. It also seems positive that there are not any penalties and that it doesn’t affect credit ratings. On the other hand, it’s not hard for the uneducated, marginalized part of our population to be taken advantage of by large (or small) companies. No one should be charged 100% interest.
Abbott has spent eight months now with the sofa set, and some days, she can shrug off the costs. She’ll sink into the cushions just before her kids get out of school and say she wouldn’t trade the feeling “for a million bucks.” Normal families have sofas, she says, and you’ll do what it takes to feel normal.
“I don’t know how we’ll make it,” Abbott said, and every solution came with a problem. Return the sofa? Sure, but she’d burn the money she’d already put into it and leave her living room with a hole.
Yes, dear god. Give it back, cut your losses, and get a free one on Craigslist. You can’t get out of a hole until you stop digging.
I’m not judging this woman or her family. They’ve probably never had a leg up in this world. Their jobs suck, the pay sucks and nobody is giving them a helping hand. I can’t control that and neither can she. What she can control is how she spends the money she does have. Paying 100% interest is literally the worst personal finance decision you could make, particularly for an item that can be had for free. Even at my current income level, my couches came from Craigslist for a total of $500.
Mental models are important and this one is a clear example of delayed gratification (the ability to forego something now for something better in the future). This is the child who can pass up the cookie for 2 in the future. Later in life its the teenager who studies over the weekend rather than being lazy, or has an 8 week plan of attack for the SAT’s.
You see this lack of forethought and delayed gratification type of behavior at all levels of society because as Joshua Kennon says,
The children of the successful enjoy success on their own not so much because of support received from the parents, but because they are taught, either directly or through cultural osmosis, the “rules” of how to succeed in our current market system. When you grow up seeing how money works, you are going to have a better chance at making money, even if you don’t enjoy an inheritance.
This is why most pro-athletes go broke shortly after they stop playing. It’s why we buy cars that costs thousands per month and blow cash at bars when we should be saving. We absorb much more than we think from our parents and those we grow up around.
Thinking about this story in mental models should encourage you to consider values, habits and other parts of your lives that you do without actively considering if they are the optimal way to live our lives. There is no reason to repeat the destructive patterns of our predecessors, Keep what makes sense and actively seek out better ways of doing and thinking about things.
Is there a way to fix these patterns on society? I’m not particularly optimistic. I tend to believe (and that data backs me up) that the best start someone can have in life, is 2 loving parents at home. There’s not much we can do about that, although I would certainly be all for better early childhood education. Try to beat some of those poor habits before they become overly engrained into the psyche of a person. Teach delayed gratification, hard work, and the value of saving. Teach the concepts of
How do we apply this to our own lives? Consider your own spending/saving habits (among others). You may not be spending time at Rent-A-Center, but we all have our own sins such as buying a car that’s too expensive on credit or that $100/weekend bar habit. There’s only 2 ways to accumulate capital, make more or spend less.