Consumer advocates skeptical of Kmart’s rent-to-own plan

Consumer advocates are skeptical of Kmart’s plan.
Getty Images/File 2012
Consumer advocates are skeptical of Kmart’s plan.

Kmart is introducing a rent-to-own program that charges the equivalent of 100-plus percent annual interest, a move into a business that has drawn criticism for hurting low-income consumers.

Kmart’s Lease-to-Own touts instant gratification. Customers without credit take a product home right away, make biweekly payments, then decide whether to buy or return the product. A typical deal could turn a $300 TV into a $415 purchase. Sears Holdings Corp., which owns Kmart, debuted a similar program at its namesake stores earlier this year.

‘‘The rent-to-own industry promises consumers the American dream of ownership,’’ said Ed Mierzwinski, at the US Public Interest Research Group, a Boston-based consumer group. ‘‘But its contracts provide for very high-cost payments, and it is difficult to complete the contract.’’


Jai Holtz, a Sears Holdings vice president, said the Sears rent-to-own program has attracted new customers who don’t qualify for credit, allowing them to buy televisions and other big-ticket items.

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‘‘I’m not here to convince you lease-to-own is not more expensive than a credit program,’’ Holtz said. ‘‘Our total cost of ownership, for a customer who otherwise cannot get credit, is much lower than the others in the industry offering these types of products. This is really coming from consumer demand.’’

Kmart’s program, which begins Nov. 22, comes as retailers brace for a tough holiday season, during which sales are projected to rise 2.4 percent, the least since 2009, according to Chicago-based ShopperTrak.

Sears Holdings has been struggling since hedge-fund billionaire Edward Lampert orchestrated the merger of Kmart and Sears in 2005. Last month, the company said same-store sales, a key gauge of performance, slid 3.7 percent in the 12 weeks ended Oct. 26 and that its third-quarter adjusted loss widened.

The company already attracts poorer customers than many of its rivals, said Matt McGinley, at International Strategy & Investment Group.


While the new program could boost sales, Kmart risks hurting an already damaged brand, said Michael Stone, who runs Beanstalk, a brand-licensing agency. ‘‘I think it probably lowers the brand value of Sears. The question is, survival or brand?’’

The company’s move into rent-to-own is unusual for a mainstream retailer. Typically, such deals are offered by chains like Aaron’s Inc.

Holtz said Sears’s and Kmart’s programs differ in several respects. His company doesn’t mark up the initial price of the product, as some rental chains do, making Sears and Kmart’s base cost as much as 40 percent cheaper, Holtz estimated. Sears limits its lease term to 18 months; other rent-to-own contracts can run for two or even four years.

That doesn’t necessarily make the service a good deal, said Margot Saunders, of counsel to the National Consumer Law Center, a Boston-based nonprofit. Saunders calculated that if customers made the minimum number of payments on a $300 television, they’d pay the equivalent of a 117 percent annual rate.

The Sears programs have a minimum lease requirement of 10 biweekly payments in most states. Then, a customer can pay a lump sum to own the product, continue to lease it, or return it. Saunders questions whether a customer who can’t afford the original purchase price can make the balloon payment at the end.


About 75 percent of rent-to-own customers return their products within four months, says the Association of Progressive Rental Organizations.