If you need a car but cannot afford to buy one on your own, you have a few possibilities. Poor credit means fewer options, but you can't have it both ways. A relative or friend may be willing to lend you a car, or you might apply for a subprime vehicle loan to buy a vehicle.
It's a three-way street: Trusting in loved ones can be a good thing—until it isn't. To make matters worse, subprime borrowers pay higher interest rates than those with exceptional or decent credit. According to CarsDirect, the average interest rate on a new subprime auto loan was 9.41% by the end of 2021. That number might be considerably higher depending on your credit rating Borrowers with strong credit can acquire a loan at about 3 percent or less.
With exorbitant interest rates in mind, there is just one choice left: Rent-to-own. However, you must consider all parts of the bargain to determine if it is the better option for you in the end.
Nonrefundable Upfront Fees
When you get into a rent-to-own agreement, you (as the buyer) pay the seller an option fee, option money, or option consideration, which is upfront, nonrefundable payment. What this charge does for you allows you to acquire the house later. As there is no standard choice charge, the amount can be negotiated. Nevertheless, the cost is normally between 1% and 5% of the purchase price.
Lease Option vs. Lease Purchase
It's crucial to know that there are various rent-to-own contracts, some of which are more accommodating to customers and offer more flexibility. This right, but not an obligation, comes with lease-option contracts. The option to purchase the property expires if you don't buy it after the lease. You have no further obligation to pay rent or buy. Lease-purchase contracts are not usually the same.
Lease-option contracts are necessary if you want the choice to buy without having to buy.
A qualified real estate attorney should review the contract before signing so that you understand your rights and exactly what you're getting into.
Buying a home after a lease is a legal obligation, regardless of whether you can afford it or not.
Agreeing on the Purchase Price
You'll want to be sure that the purchase price of your house is clearly defined in your rent-to-own arrangement. When the contract is signed, you and the seller may agree on a purchase price that is more than the market value. In other cases, the price is set based on the property's then-current market value at the lease expiration. In places where property prices are rising, purchasers often desire to "lock in" their purchase price.
Applying Rent to the Principal
During the lease, you will be required to pay rent. The real question is whether or not a portion of each payment goes toward the final cost of the transaction. The rent credit is the difference between what you pay each month ($1,200 x 0.25 = $300; $300 x 36 months = $10,800) and what you get back as a credit toward the purchase of the home. To compensate for your rent credit, the rent is typically slightly higher than the neighborhood average. It's important, however, to know what you're getting for your money.
Depending on the contract, you may be able to apply some or all of your option money toward the final purchase price.
Maintenance of a Rent-to-Own Residence
Depending on the contract terms, you may or may not be responsible for the property's upkeep and maintenance costs. The landlord is usually responsible for this, so be sure to read the tiny language of your rental agreement. Because homeowners' association dues, taxes, and insurance are ultimately the seller's responsibility (because it is still their home), this is a common practice. Both scenarios require a renters insurance policy to cover personal property losses and provide liability protection if someone is hurt while visiting the home or if anything goes wrong and you injure someone.
Don't forget to include maintenance and repair requirements in your contract! (ask your attorney to explain your responsibilities). Isn't it time-consuming and tedious to maintain your own home? Mowing the lawn, raking leaves, and cleaning out gutters all fall into this category. Before signing anything, get the house examined, request an appraisal, and confirm that the property taxes are current, regardless of whether you'll be in charge of everything or just the lawn.
