Rent-to-buy: How many second chances do they deserve?

How should we describe a Government that wants to end the practice of 884% equivalent interest rates being charged to Australians who don’t have a spare $345 to buy a clothes dryer? It is a Government that is committed to ending the exploitation of struggling Australians by high cost lenders, and brave enough to push back against industry scaremongering.

Changes to consumer lease regulations are soon to be debated in the House of Representatives. The predatory practices of both consumer lease providers and payday lenders have received significant publicity in the media, with these businesses regularly indulging in egregious tactics. The continuing public pressure and clear evidence of harm is why the government has finally decided to act.

Consumer leases (also known as ‘rent-to-buy’) are regulated by the National Consumer Credit Protection Act 2009, but the conditions that apply to such leases are fairly light-touch compared to other types of credit. First, there is no cap on the amount lease providers can charge, unlike other lenders. Furthermore, a product bought under a rent-to-buy contract can cost as much as six times the recommended retail price. An ASIC analysis found that people were charged between $556 and $2,462 more for goods than would be permitted for a payday loan.[1]

ASIC’s analysis lines up with the experiences of our clients. Take Davinia Convery, who entered into five rent-to-buy contracts between January 2013 and September 2016. These would have required Davinia, a single mother of four on an extremely low income, to repay a minimum of $11,619.40. The prices for these contracts, expressed as an interest rate, was between 217% and 503%. The repayments for one tablet, which her child needed for school, were over 6 times the recommended retail price. The lease provider repeatedly sent Davinia SMS messages encouraging her to lease additional goods, even though it was on notice that she could not afford to pay.[2]

The cost of a consumer lease is usually expressed as a low ‘per week’ amount, but no lease providers properly disclose the full cost of making many years of payments in advertisements. Other credit providers, by comparison, are required to indicate an interest rate and comparison rate if they make the same representations about ‘per week’ price.

The market for consumer leases is large and growing, especially among the most vulnerable. IBISWorld estimates that the size of the Australian consumer leasing market in 2015-16 is around $596 million for rentals of electronic goods (including televisions, stereos, DVD players and computers) and household appliances (including fridges, ovens, microwaves, toasters and blenders). It reported a high use of consumer leases by people relying on income support who can’t afford to buy household essentials upfront. Often, people end up with multiple high cost leases, which leads them into a spiral of debt. This is why the Government plans to limit consumer lease repayments to 10 percent of a person’s net income.

The same ASIC analysis also found that different lease providers charged groups of customers significantly different amounts for the same goods. The people that are more likely to pay the higher amounts are Centrelink recipients, despite having lower incomes and being the least able to afford it.

Figures also show that lease providers are making huge profits from access to Centrepay, the government’s bill paying service that gives lease providers priority access to people’s welfare payments. For example, Radio Rental’s total revenue in the 13/14 financial year was $197 million, and $90 million of that came from Centrepay payments.[3] Access to Centrepay means that repayments to lessors can be prioritised over other essential expenditure like food and travel.

And despite consumer lease providers being subject to lighter touch regulation, they continue to flout the law. In July, The Rental Guys were required to pay $100,000 to vulnerable regional customers after ASIC found the company failed to meet its responsible lending obligations when renting white goods and furniture. Consumer lease provider Motor Finance Wizard was also required to pay more than $11 million in remediation over responsible lending concerns. ASIC cancelled the credit licence of consumer lease provider Rent to Own Appliances. Just last month, Consumer Action took legal action against another provider, Rent 4 Keeps. The list of enforcement action goes on and on.

The consumer lease industry has proven time and time again that it can’t be trusted to look out for Australians. Instead, key players regularly contravene responsible lending regulations, and charge exorbitant fees. How many second chances do they really deserve?

[1] http://asic.gov.au/about-asic/media-centre/find-a-media-release/2015-releases/15-249mr-asic-finds-the-cost-of-consumer-leases-can-be-as-high-as-884/

[2] You can find out more about Davinia’s story here: https://consumeraction.org.au/dont-take-no-answer-davinias-story-rent-buy/.

[3] Credit Suisse, ‘Australian ESG/SRI – Risks in payday lending and goods rental’, published 3 March 2015. See also the ABC’s report on Radio Rentals here: http://www.abc.net.au/news/2015-03-20/radio-rentals-reaps-90-million-in-centrelink-payments/6333690 

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