Should you take out a loan or rent-to-own?

A personal loan can, among other things, help you buy an item that you need but can't afford. However, new finance models are emerging, such as rent-to-own, which offers the same solution in a somewhat different format. 

We find out what rent-to-own models entail, and we compare personal loans with these new subscription options.

Tip: If taking out a personal loan suits your circumstances, visit this page for more information.

What does rent-to-own mean?

Matthew Cruise, lead campaign manager at Hohm Energy, says that many providers have started to move towards a subscription model for selling their goods as an alternative to outright purchase.

“Most of us buy our cellphones on a contract basis, which is essentially a subscription model. In other words, you make a monthly payment so that you can use a phone, which becomes yours after a particular period,” says Cruise.

He explains that this model is being applied beyond cell phones to electronics, appliances, furniture, and even fashion and leisure equipment. More recently, it’s even being used for solar power systems in residential homes.

“With Eskom forecasting power disruptions for the foreseeable future, alternative energy solutions have become a must-have rather than a luxury. But for many homeowners, the cost of installing a solar solution may be off-putting,” says Cruise.

He explains that the rent-to-own model can be more viable than having to make a large capital outlay in one go. Ultimately, a solar power system – as with all rent-to-own products – can eventually belong to the subscriber.

Rent-to-own versus a personal loan

A more traditional variation on the rent-to-own model is a personal loan. The benefits of this kind of credit are, among others, as follows.  

• You can borrow any amount you like. Personal loan amounts can vary from a relatively modest amount – enough, for example, to buy a home appliance – to a sum sufficient to pay for renovations to your home. The amount offered will depend in large part on your credit score.
• When well managed, it improves your credit score. Every month that you make your personal loan instalment, your credit score will receive a positive bump. Over time, you will be able to qualify for more credit, and at a lower interest rate.
• You immediately own the item you purchased. Personal loans are considered to be unsecured debt, which means that they are not attached to an asset – as, for example, a car would be to vehicle financing. The item you buy with your personal loan doesn’t belong to anyone else, it belongs to you from the outset.

On the downside, personal loans are notorious for attracting high interest rates. Furthermore, they can leave you in debt for many years, depending on the terms of your credit agreement.

As the cost of living increases, notes Jonathan Hurvitz, CEO of Teljoy, consumers will be reluctant to meet their short-term needs by incurring excessive debt. This is where rent-to-own may be of benefit.

“The subscription model prioritises access over ownership and removes the risk of debt from the equation. By paying for the use of a product on a subscription basis, there is no burden of an upfront purchase on credit,” he says.

Consumers can take ownership of the product after a predetermined period, Hurvitz says. Upgrades, downgrades, or even cancellations are available at any time.

“The burden of fixing or replacing the item is on the provider, and not on the consumer. This allows the consumer to enjoy the use of the product without the risk and responsibility that comes with ownership,” he says.

Are you struggling to pay your debt? Find out how to consolidate what you owe.