Lease to own may be a good idea if you do not have good credit or money for a down payment. But keep in mind that you may pay more in the long run and be responsible for maintenance. Lease to own may be a good idea for some individuals and bad for others.
Leasing vehicles is a viable option for some consumers, but it is not a popular one. In 2022, fewer than 19% of buyers leased their vehicles.1 If you do want to sign up for a lease-to-own contract in order to get a car or home, it’s critical to understand the financing process.
In this article, we’ll answer the question, “How does rent-to-own work?” and help you better understand the pros and cons so you can decide whether a lease could be the right option for you!
What Is a Rent-to-Own Agreement?
A rent-to-own agreement is an arrangement between a buyer and a seller with the understanding that the buyer will rent an asset or piece of property for a specific period of time, after which the buyer will officially purchase the asset from the seller. Typically, lease options are available for a vehicle, a rent-to-own home, or land.
How Do Rent-to-Own Agreements Work?
How does rent-to-own work? The rent-to-own process is fairly similar to the traditional renting process. You visit a property, speak with the landlord or property manager, and submit an application. Upon approval, the property owner will approach you with a contract. Read over the contract carefully and make sure you understand everything. Once you do, simply sign the contract and enjoy your property!
The rent-to-own process also usually comes with a few loan fees. Instead of a down payment, rent-to-own agreements usually require an option fee. An option fee, also called option money or option consideration, is usually around 1% to 3% of the total purchase cost.
What Are The Different Kinds of Leases?
Whether you are planning to purchase a car or a home with a lease, there are a few different kinds you want to know about.
| Type of Lease | Description | Common Use | Key Characteristics |
| Open-Ended Lease | The final purchase price is not fixed at the start of the lease and is determined at the end of the lease term. | Mainly Vehicles | – Flexible end-of-lease terms – Purchase price based on market value at lease end – Higher risk due to variable costs |
| Closed-Ended Lease | The purchase price and other terms are agreed upon and fixed in the contract at the beginning of the lease. | Mainly Vehicles | – Fixed terms and purchase price – Lower risk as costs are predetermined – More common in vehicle leasing |
| Lease-Purchase Agreement | The renter is obligated to buy the property at the end of the lease term. The terms, including the purchase price, are usually decided at the beginning of the lease. | Homes and Real Estate | – Commitment to purchase at lease end – Terms and price often set in advance – Ideal for renters certain about future purchase |
| Lease Option Agreement | Gives the renter the option (but not the obligation) to buy the property at the end of the lease term. The purchase price may be determined at the start of the lease or left open until the end of the lease period. | Homes and Real Estate | – Option, not obligation, to buy – Greater flexibility for the renter – Purchase price may be negotiable or fixed in advance |
| Rent-to-Own Agreement | A hybrid form of lease where a portion of the rent payments is applied toward the purchase price of the property. This can be structured as either a lease-purchase or a lease-option agreement. | Homes and Real Estate | – Part of rent goes toward the purchase price – Can lead to homeownership – Terms vary widely based on the agreement |
For an auto lease, there are open-ended and closed-ended leases. An open-ended lease leaves details like the final purchase price up to negotiation at the end of the contract, while a closed-ended lease finalizes the details within the contract. The average car lease costs $487 per month.2
For homes, there are lease-purchase agreements and lease option contracts. A lease-purchase agreement, also called a lease-purchase contract, commits the person renting the property to purchase it at the end of the lease term. A lease option contract also called a lease option agreement, gives the person renting the property the choice of whether to purchase the property or not at the end of the lease term.
Lease purchase agreements hammer out most of the specifics within the actual contract, like purchase price and other fees. On the other hand, lease-option agreements leave those details up for negotiation after the lease term ends. If you know for sure that you want to purchase the property you are renting, you may want to opt for a lease-purchase contract. If you would like some time to think and decide, consider a lease option contract.
Can You Break a Rent-to-Own Lease Early?
Breaking a lease is not ideal, but sometimes it is the only option. Unfortunately, if you break a lease for a vehicle or a home, there are consequences you may have to deal with. If you break a car lease, there are most likely fees and penalties you will have to pay. Similarly, if you break a property lease, the landlord may have you pay the following monthly rent payment or cover other fees and expenses you would have been responsible for if you were still in the lease.
Does Lease-to-Own Build Credit?
You may ask, “Does paying rent build credit?” Over time, leasing to own has the ability to help your overall credit! When you commit to a rent-to-own lease agreement, you acquire what is considered by most financial institutions as good debt.
Good debts are loans and other financial endeavors that benefit the borrower in the long run. Rent-to-own debt benefits the borrower in the long run because, at the end of the lease term, they end up with a valuable piece of property. Other types of good debt are student loans that work towards giving the borrower an education.
Alternatively, there are also bad kinds of debt. Bad debts are loans that bring only short-term financial relief and typically no other benefits. These types of loans also usually leave the borrower in more debt than what they started with. Examples of bad debt include payday loans, cash advance loans, and bad credit loans.
Pros and Cons of Rent-to-Own Contracts
Before committing to a rent-to-own contract, consider the advantages and disadvantages.
The Pros
Some perks you can take advantage of with a rent-to-own agreement are:
You Don’t Need Perfect Credit
In order to qualify for a mortgage with ideal interest rates, buyers will need to have a decent credit score. Usually, people with scores within the seven or eight hundred range will get the best mortgage rates. If you have poor credit, you may not get approved for a mortgage loan at all. Or, if you do, chances are the interest rates will be on the higher side.
With a rent-to-own agreement, the credit score requirements are much more inclusive. You could be approved for a loan with competitive rates even if you have less-than-perfect credit. That way, you can rent a home with bad credit.
Rent-to-Own Programs Give You Time To Save Money and Avoid a Down Payment
When purchasing a home with a mortgage, buyers are typically required to make a large down payment before closing on the agreement. A down payment allows the lender to provide lower loan amounts. Borrowers benefit from a down payment by acquiring ownership quicker and lowering the cost of monthly payments.
A down payment can be anywhere from 3% to 8% of the total purchase price. Depending on how expensive the home is, you could be looking at a down payment of tens of thousands of dollars when buying. If you don’t have a lot of money for a down payment, you may find it challenging to qualify for a mortgage.
With a rent-to-own home program, you have a bit of time to save money instead of paying a bulk sum down payment upfront. That way, you will be better able to afford the purchase price at the end of the lease.
The Cons
There are also some disadvantages of rent-to-own homes you should be aware of.
May Still Be Responsible for Maintenance
Homeowners with rent-to-own homes are often responsible for property upkeep and maintenance in a rent-to-own program. With a traditional renting agreement, the landlord is in charge of paying for and maintaining the property. This responsibility can save renters hundreds or even thousands of dollars, depending on the kind of upkeep the property requires. But, with rent-to-own homes, the original landlord will often shift that responsibility to the future buyer.
Before applying for rent to own homes, make sure you can afford expenses like:
- Appliance upkeep and repair
- Landscaping
- Electrical Repair
- Roofing
- Property taxes
- Possible association fees
Not All the Money Goes Toward the Purchase Price
Rent-to-own agreements can be a bit of a financial drain. As you pay rent during the terms of a rent-to-own agreement, not all of the money goes towards the actual home purchase. Instead, none or just a portion of the money you pay goes towards your future purchase. Rent-to-own contracts should clearly display how much each monthly payment will go towards a down payment or the overall purchase price.
What To Do Before You Sign a Rent-to-Own Agreement
Before you sign a rent-to-own contract, there are a few precautions you may want to take.
Understand the Terms of the Rent-to-Own Agreement
When you receive the rent-to-own contract, read it over thoroughly. Make sure you understand all the terms, deadlines, and potential penalties you will have to deal with if you break your lease. The contract should also state how much your rent payment will be and the time when you should expect to pay the eventual purchase price.
Get Help With Rent-to-Own Contracts if Needed
If there is anything in your lease-purchase agreement that you don’t understand, consult an expert. You may want to get some assistance from a real estate attorney or a real estate agent. These real estate professionals should be able to answer any questions you have about rent-to-own homes and contracts. They may even be able to help you negotiate a rent payment, down payment, or the final purchase price of the property.
Finalize the Details
Both the buyer and seller should agree upon the basic details of rent-to-own agreements. Talk with the buyer and make sure you both are on the same page about core details like:
- Who is paying for upkeep and maintenance?
- What is the lease period?
- Will the final purchase price be determined beforehand or by the real estate market value after the terms of the contract?
Research the Rent-to-Own Property, Area, and Seller
Finally, before committing to a rent-to-own contract, do a bit of research on the property, area, and even the individual seller. Make sure the property value aligns with the purchase price requested by the seller. If they are asking for a higher price than the property is worth, consider negotiating for a more reasonable price.
Frequently Asked Questions About Rent-to-Own Contracts
In a lease-purchase agreement, you’re generally committed to buying the property. However, if you choose not to proceed, you might lose any rent credit or additional payments made toward the purchase. It’s crucial to consider your long-term plans and financial stability before entering such an agreement.
Yes, in a lease option agreement, you often have the flexibility to negotiate the purchase cost either at the beginning or end of the lease term. This negotiation can be beneficial if the property value changes during the lease period, but ensure that any agreed terms are clearly documented.
Rent credit refers to a portion of your rent payments being applied toward the purchase cost of the home. This arrangement should be clearly outlined in your rent-to-own contract. It’s a way to build equity in the home during the rental period, making it easier to finance the remaining balance later.
Typically, rent-to-own contracts don’t require a traditional down payment but may require an option fee, which may or may not be applied toward the purchase cost. This fee can sometimes be substantial, so it’s important to understand how it affects your finances and the overall cost of the home.
Rent-to-own contracts include an option or obligation to purchase the property, unlike standard leases. They also often involve rent payments contributing toward the purchase. This dual nature of the agreement provides a pathway to homeownership while still functioning as a rental.
Risks can include losing money paid above the standard rent if you don’t qualify for a mortgage at the end of the lease or if you decide not to buy the property. Additionally, if the property’s value decreases, you might find yourself committed to a purchase at an inflated price.
Work on improving your credit score, save for a down payment and ensure your income is stable to increase your chances of qualifying for a mortgage. Regularly reviewing your credit report and financial situation with a financial advisor can also help prepare you for a mortgage application.
Look for clear terms regarding the option fee, rent credit, rent payments, purchase cost, and your rights and responsibilities as a tenant and potential buyer. It’s also wise to have clauses that address what happens if either party fails to uphold their end of the agreement.
This depends on the terms of your agreement. Some contracts may allow you to sell your option to purchase to a third party. However, this is often subject to the original seller’s approval, and specific conditions may apply.
Rent-to-own properties might have higher monthly payments due to a portion going toward the purchase cost, but this can vary based on the agreement. While initially more costly, this arrangement can be financially beneficial in the long run as it contributes to homeownership.
What CreditNinja Wants You To Know About Lease-to-Own Programs
When purchasing a home or a vehicle, how you go about buying it is an important decision. Buying outright is quicker but more expensive, while a lease-to-own takes longer but may be more affordable. In the end, do whatever is most comfortable for you.
CreditNinja offers free financial articles to help borrowers just like you make well-informed financial decisions. Check out our online blog to learn whether leases show up on credit reports, if paying rent helps build credit, and much more!
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