Something new for Kmart shoppers: Now you can take home some of the products you want, even if you don’t have enough cash or credit to buy them.
Kmart’s lease-to-own financing program is now available nationwide (and year-round) on merchandise priced at $150 or more. About 600,000 products, including consumer electronics, sporting goods, home appliances and toys are available this way.
Jai Holtz, vice president of financial services at Sears Holdings (Kmart’s parent company), told me they are trying to give customers another way to finance their purchases.
“Many customers don’t have access to credit right now,” he said. “They don’t have options when their refrigerator or other appliances break. We’re trying to provide those options for them.”
Some consumer advocates see it quite differently.
“Rent-to-own targets low-income people,” said Ed Mierzwinski, director of consumer programs at U.S. PIRG. “People who can’t afford to pay on the spot end up spending significantly more than the retail price.”
How the lease-to-own program works
Customers who opt for Kmart’s lease-to-own financing will make the first lease payment at the store, followed by monthly or bi-weekly payments made electronically through automatic bank withdrawal.
The initial contract is five months. After that, you can buy the item by making a balloon payment, return it or continue the lease for another 13 months. Anytime during that period, you pay the balloon and purchase. At the end of 18 months, you have two choices: buy or return.
So what do you actually pay?
Let’s say you took home a $400 TV using the lease-to-own program. According to figures provided by Kmart, you would have paid $333 at the end of five months. You'd need to come up with $220 to buy the set outright. So, your total cost at that point would be $553.
Unlike many other rent-to-own programs, Kmart does not mark up the retail price of the product and it limits the lease contract to 18 months. Renewing the contract over and over again is one of the big traps with traditional rent-to-own.
To qualify, you must earn at least $1,000 a month, be 18 or older and supply a Social Security number. You can lease several items at once, but one of those items must be $150 or more. Lease-to-own is not available for online purchases, so you must go to the store to get all the details.
It sounds good, so what’s the problem?
For someone with little or no credit, this sounds like a dream come true. But is it?
“If the point of the transaction is to rent it, that’s one thing,” said Margot Saunders, counsel for the National Consumer Law Center, a Boston-based advocacy group. “But if the goal is ownership, this is a very, very expensive way to buy something.”
When you use a credit card, you know how much you’ll pay to finance that purchase. The credit card company is required to provide you with the Annual Percentage Rate for the interest charged on an unpaid balance. With rent-to-own, there is no such disclosure.
Mierzwinski doesn’t like rent-to-own in general or Kmart’s program in particular. He believes customers will focus on the monthly payments and not the total cost or that big balloon payment required for ownership.
“They convince you to buy something you can’t afford by focusing on that small monthly payment,” Mierzwinski said. “It’s very clever marketing.”
Kmart says it will trust its shoppers to make the best choice for their individual situation.
“Since we’ve rolled out this program, customers have reacted very positively to it,” Holtz said. “It’s something they really want and need during this time of tight credit.”
The bottom line:Layaway is a better option for those on a limited budget if you can wait and don’t need to make an instant purchase. There may be a small administrative fee — Kmart charges $5 for an eight-week layaway contract; there is no upfront charge at Wal-Mart. But with layaway, you pay the retail price, just like any other customer.