How to Read and Understand Lease-to-Own Contracts

Most of the "No Credit Needed" financing offered at retailers isn't a loan at all — it's a lease-to-own (or rent-to-own) contract. These agreements come with specific terms that decide how much you'll ultimately pay for the merchandise you're taking home. Let's walk through an example using one of the largest companies offering this kind of arrangement.

Example: Progressive Leasing. (The rental fee, initial payment, and early buyout options will differ by retailer and by the state you live in.)

The terms you'll see on the contract

• Cash price — what you'd pay at the store with cash.
• Cost of rental — the rental fee charged on top of the cash price.
• Total payment — the total amount paid over 12 months.
• Initial payment — the amount due when you sign the contract, covering the rental period up to your first payment date.
• Amount of each payment — what's debited from your account on the agreed schedule (weekly, twice a week, twice a month, or monthly).
• Number of payments — the total number of payments, including the initial payment.
• Rental period — the term of the lease; the most common is 12 months.

So what are you really paying for this merchandise?

Compared to paying cash at the store (pre-tax), here's how the same item adds up:

• Pay over 12 months: you'll pay $3,486.50 more, for a total of $6,236.50.
• Pay within 90 days: you'll pay only $49 more, for a total of $2,799.00. Progressive's contract states: "You can exercise an early purchase option by purchasing the property at any time during the first 90 days after it's delivered to you by paying the '90-Day Purchase Option' amount plus tax and any returned-payment fees, with credit for all payments you've made. The 90-Day Purchase Option amount is $2,799.00."
• Pay at the 6-month mark: you'll pay $2,725 more, for a total of $5,475.00. Progressive's contract states: "You can also purchase the property at any time by paying an amount equal to any payment then due (including returned-payment fees), plus the 'Early Buyout Option' amount, which is 65% of the unpaid recurring payments."

The quick math

• Pay within 90 days and you pay just $49 more than the cash price — this is the best option.
• Pay after 90 days up to 6 months, and the total cost is 1.75 to 2 times the cash price.
• Pay over the full 12 months, and the total cost is about 2.25 times the cash price.
• For comparison, a 12-month loan at this cost would carry roughly a 190% APR.

Fine print to watch for

• The initial payment amount can vary by retailer.
• The 90-day early-buyout countdown can differ by company — confirm the exact date.
• Some companies require you to call them to exercise your 90-day early-buyout option.
• Some companies will no longer offer the 90-day early buyout if you've missed or been late on any payment.
• The 90-day early-buyout price may include an additional markup and fee.
• Know what you'll pay if you can't pay it off in 90 days. The amount to buy out your lease after 90 days will surprise you.