Renting items you plan to buy: sometimes it's borrowing trouble

Rent-to-own. Is it a scam to bilk low-income folks? Or a sorely needed service for consumers who can't get credit? Poverty lawyers plead the former, and a class-action suit pending in Connecticut illustrates their case.

New Haven resident Regina Allen went to Rent-A-Center to get a stereo system. After 17 months of renting, she would own the hi-fi.

Each week she dutifully paid $17.95. Then, a billing discrepancy arose. Under terms of her contract, which is typical, each payment is a renewal of the contract. When payments stop, the rental agreement is broken. Rent-A-Center claimed she'd missed three payments and asked for the stereo. Ms. Allen refused, saying she'd made her payments.

She'd already paid $1,000 for a stereo valued at $500, but the contract showed she still owed an additional $382 before she could become the owner.

That was over three years ago. The store has since folded, but the New Haven Legal Aid office has received more than 200 rental complaints in the last two years about other rental firms, says staff attorney Joanne Faulkner.

During the same period, appliance rentals nationwide have soared. Two years ago there were some 2,000 outlets. Today, there are some 4,000 stores generating sales of $1.5 billion in television rentals alone (which account for half the business), according to Edward Winn III, executive director of the Association of Progessive Appliance Rental Organizations (APRO) of Austin, Texas.

''Cash cows'' is what Jim Cohlmia dubs the proliferating outlets. ''It's not unusual for a store to pull in $40,000 to $60,000 profits per month,'' says the vice-president at B. C. Christopher Securities, a brokerage house in Wichita, Kan.

The industry has been milking a market fed by high interest rates, Mr. Winn said in a telephone interview. ''When they moved up to 20 percent, that cut off a great chunk of the people from the consumer credit market. And that hasn't changed,'' he says.

''As many as 30 to 35 percent of the American public has no credit at all. All those folks are our customers,'' adds Winn.

Almost universally, rent-to-own outlets offer appliances with free delivery, free servicing, and no credit checks, or down payment.

It's an industry that plays on the fears of low-income people, say critics.

''They're appealing to people that think they can't get an appliance (on credit or a layaway plan) from Sears or Zayre's (a department store chain based in Framingham, Mass.),'' says Robert Hobbs, staff attorney at the National Consumer Law Center (NCLC), in Boston. ''People end up paying a price two- to three-times higher than retail because they think they have to pay more (for being a poor credit risk),'' he says.

Hobbs is irked by the contracts, too. He claims they are set up to ''escape truth-in-lending and usury laws.'' Charging $1,004 ($18 per week for 78 weeks) for a television worth $400 is the equivalent to charging a 201 percent annual interest rate, according to an NCLC report on the subject. Most states have credit laws that require disclosure of interest rates and finance charges as well as place a cap on how much interest can be charged.

But short-term rental agreements are not credit sales, contends the industry, and therefore are not subject to credit laws.

''Legal Aid calls it a disguised credit sale. That's a preposterous notion. . . . There is no debt,'' exclaims Winn. Customers aren't paying interest fees, they're paying for convenience and service, he says.

''The service factor is largely ignored. You cannot buy a service contract from anybody that will provide the service we provide. If the set breaks we come fix it or pick it up and replace it - all free of charge. Sears won't do that,'' Mr. Winn notes.

Nonetheless, Maine, Pennsylvania, Minnesota, and North Carolina have passed laws that regulate certain kinds of rent-to-own plans under state credit laws.

APRO itself supports a federal bill tied to an omnibus Financial Services Competitive Equity Act sponsored by Sen. Jake Garn (R) of Utah. One aspect of the bill, awaiting a senate vote, would require rent-to-own contracts to give an appliance's total cost if the purchase option is used.

The NCLC, once a supporter, has backed off from the bill. It wants contracts to include the fair market value of the appliance and annual percentage rate figures so consumers can comparison shop.

APRO favors the bill because it will preempt the patchwork of varying state laws with one set of rules. Says Mr. Winn: ''We want the regulation because it will lend an air of legitimacy to our business.''

The industry has been plagued by ''a few bad apples,'' admits Mr. Winn, ''and there are still a few around. The problems are mainly in the area of repossession tactics.''

''Most of that stuff has been cleaned up,'' says Mr. Cohlmia of B. C. Christopher Securities, referring to Rent-A-Center Inc. Based in Wichita, Rent-A-Center is the largest publicly held rental concern. ''It's positioned for 30 to 35 percent growth over the next five years,'' he figures.

The market has been blue-collar workers, ''the guy that drives a trash truck for $700 a month and has lousy credit,'' says Mr. Cohlmia. But, ''now the big growth is in the West and Southwest where the young, married couples are.''