Where can you buy a $1,000 TV for $2,169? That would be a Best Buy store near you.
The electronics retail giant is poised to roll out a new “lease to own” program that sounds a lot like the Rent-A-Center or payday lending model. Consumers with little or no access to traditional credit can “buy” gadgets for a fraction of the cost up front, then make payments during a 12-month period through partner Progressive Leasing.
In the TV example, a consumer in Maryland who signs up for a Best Buy lease would pay only $79 at the store but then make 12 monthly payments of $174.17. The “cost of lease services” for that period makes the full payment $1,169 higher than the retail price of the item.
Expressed as a loan, the annual percentage rate for the financing of that purchase would be about 195 percent, according to the National Consumer Law Center.
“I can say that 195 percent is an exorbitant rate,” said Margot Saunders, senior counsel with the NCLC.
Consumers who manage to pay off the full cost of the TV within 90 days pay only the $79 for the convenience of the lease agreement.
Reaching customers without credit
Best Buy says it has tested the program in Texas and plans to roll it out nationwide, beginning in 35 states, in March.
“I think what’s important here is that this genuinely is a whole new tranche of customers that would not be able to purchase products with us,” said CFO Corie Barry during an earnings call Wednesday, according to quotes provided by Best Buy spokesman John Vomhof. “I mean, think about it, sometimes this isn’t just people who have bad credit, this is people who in some cases just have no credit, and this is the start for them to be able to build a credit portfolio and actually will lead to a much more robust credit portfolio over time. And history has shown us very, very, very few, to the less than 1 percent range, of these customers go delinquent on their agreements.”
The calculation cited above is not available at Best Buy’s Frequently Asked Questions page for the service. It is available to consumers who send a text to a special Best Buy short code with the message “info.” A text response sends consumers to a website, Approve.me/BestBuy. There, after being presented with additional terms and conditions, would-be buyers are shown a tool to estimate payments. Users are asked to provide their ZIP code and the store they will be shopping at, presumably because that will impact the terms of the lease.
Some states cap short-term lending rates; others ban these kinds of financial products.
According to the terms and conditions, the Best Buy program is not available in five states: Minnesota, New Jersey, Vermont, Wisconsin or Wyoming.
Convenience versus credit hole
Rent-A-Center-style leasing has been criticized in the past because many consumers end up missing payments and can have their leased items repossessed, which means they’ve lost all the money they’ve put into buying the item. (The Approve.me terms make clear that the consumer does not own the item until the last payment is made.) For example, a person who made six payments in the situation above would have paid $1,123 already — more than the original item price — and could end up with nothing to show for it.
Buyers are required to make automatic payments through a checking account or credit card. That could put them at risk of overdraft fees if their balance falls below the monthly payment amount.
Best Buy said the new program would be welcomed by consumers who have no other way to buy big-ticket gadgets.
“These are generally customers who can’t get credit through Citi, and many are taking advantage of the early purchase option,” Vomhof said.
Progressive Leasing conceded that consumers who carry their agreement through all 12 months end up paying double the original price for the item, but Garet Hayes, director of public relations at Aaron’s, which acquired Progressive Leasing in 2014, said that most customers don’t use the process that way.
“The vast majority of our customers exercise an early buyout option that is substantially less than if they carry their agreement to the full term,” she wrote. “For example, the most popular path to ownership is our 90-day purchase option. … We believe the popularity of our offering is driven by flexible payment schedules and the customer’s ability to cancel their agreement at any time without any future payment obligation.”
Progressive Leasing has partnerships with several other large retailers, for example, Big Lots and Kay Jewelers. It also tested a program with Walmart in 2016. The firm says it provides lease-purchase solutions through more than 20,000 retail partner locations in 46 states; it also operates through retail stores known as Aaron’s.
Aaron’s entered what it called the “Virtual Rent to Own” market in 2014 when it acquired Progressive Finance Holdings for $700 million. At the time, the firm said Progressive had 5,500 retail partners with approximately 15,000 locations, “including 40 of the top 100 and eight of the top 20 U.S. furniture and bedding retailers.” It cited partners Mattress Firm, Big Lots, Art Van Furniture and Sleepy’s, and also said Progressive was the preferred lease provider to the U.S. prepaid wireless industry.
“With 35% of the population struggling with subprime credit scores, many merchants lose sales when these customers don’t qualify for traditional lending options. Progressive Leasing solves this problem at over 20,000+ retail locations with our custom-built no credit needed lease-to-own purchase option,” the firm says on its website. “When retailers offer multiple options for customers of all credit types, they can start saying ‘YES’ and stop seeing customers walk away empty-handed. Capturing primary turn downs is only the beginning. With Progressive, merchants start approving up to 65-75% of primary denials. This means an increase in revenue AND happy customers.”