MY MONEY

The true cost of rent-to-buy appliance deals

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"Rent, Try, $1 Buy." Deals such as this convinced one Victorian mum of four to enter into four rental agreements.

While the household items involved were worth only about $9920, the total amount of rent for the two years was more than $18,500. Michelle Thompson, 26, also had no right to keep the goods.

Why anybody would enter into such an agreement is beyond me but, fortunately, I have never been in a situation where essential items such a fridge or washing machine have been out of my financial reach. The question that we should be asking is how can such unconscionable business practice be permitted.

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With rent-to-buy agreements, you rent a new or used item (for example, a fridge) for an agreed period of time.

You make regular rental payments, for example, every month over three years. You are not hiring the goods but you are making a commitment to buy them.

At the end of the rental period, you pay an amount to finalise the purchase. Because they are technically a lease rather than a credit contract, this $570 million industry manages to avoid the National Credit Code, which promotes disclosure and protects consumers from excess fees.

"We call these leases 'credit in disguise'," says Adam Mooney, the chief executive of Good Shepherd Microfinance, which provides loans for people on low incomes.

"The vast majority of customers will end up owning the product by making a tokenistic payment, which is often as little as $1. But that tricky buyout option enables them to avoid regulation."

Mooney says rent-to-buy agreements should be subject to the same regulations as other high-cost credit options such as payday loans, which are capped at 24%.

In Thompson's case, she paid interest of between 26%pa and 46%pa on the goods.

It sounds outrageous but, according to a report into the rental industry by the Australian Securities and Investments Commission (ASIC) late last year, Thompson got off lightly.

In another highlighted case, a customer on Centrelink was charged an interest rate of 884.34% on lease for a 5kg-capacity dryer.

Here's the problem with rent-to-buy agreements. They appeal to those who can least afford them. They're typically promoted through retail stores by salespeople who have no idea whether or not the applicants can afford them.

Gerard Brody, CEO of the Consumer Action Law Centre, says a gap in the law means that retailers do not have to ensure that in-store finance is responsibly lent.

Also, these agreements are marketed in such a way that consumers have no real idea what they're in for.

Thompson took legal action against Flexirent. She alleged it failed to comply with its responsible lending obligations and entered into unjust contracts by leasing her products purchased at a Harvey Norman store. She survives on already insufficient welfare and couldn't afford the repayments. She won a settlement of nearly $4000.

Under the 2009 National Consumer Credit Protection Act, all credit licensees must comply with the responsible lending obligations.

Put simply, this means they must make reasonable inquiries about your financial situation; they must take responsible steps to verify your situation and then make a preliminary assessment about whether the credit contract is "not unsuitable" for you.

Mooney says Good Shepherd Microfinance has called for the cost to be capped at the same level as payday loans, for capped lease terms and for greater price disclosure.

Meanwhile, the no-interest loans offered by Good Shepherd Microfinance are a safe and affordable alternative. It provides up to $1200 for household essentials - whitegoods, furniture and computers.

Can you claim against irresponsible lending?

You can lodge a dispute with the Financial Ombudsman Service for compensation for the loss you have suffered as a result of your bank providing you with an unsuitable loan.

If the ombudsman decides that your bank has been irresponsible, compensation comes down to what you used the funds for and how much you benefited.

For example, if the loan was used to purchase a house, the ombudsman would consider any benefits you received while you owned the property.

If you lived in the property while trying to make loan repayments, then you didn't pay rent, so you received the benefit of not paying rent. The ombudsman decides what portion of the loan you're expected to pay. See fos.org.au.

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Effie Zahos is editor-at-large at Canstar and a financial commentator. She is the author of A Real Girl's Guide to Money: From Converse to Louboutins, and a regular money commentator on TV and radio across Australia. In 1999, a background in banking Effie helped kickstart Money, which she edited until 2019. Effie holds a Bachelor's degree in economics.
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