Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Lease to Own

What it is:

Lease-to-own contracts can be very helpful in the case of musical instruments and children, but they can also be very costly. Furniture, for example, is a popular thing to lease-to-own. Often, customers don’t have the cash or credit to purchase a house full of furniture at once, and so they lease to own, often not realizing that the total payments on the furniture can amount to paying 150% or more of the original price of the furniture.

Also, lease-to-own agreements don't always state that the lessee is automatically the owner of the asset at the end of the lease term. Sometimes, the lessee simply obtains the option to purchase the asset for a low price at the end of the lease term, which results in an additional cash outlay on the lessee's part.

How it works (Example):

For example, let's say John Doe's son, Jake, wants to learn to play the flute. Flutes usually cost $500-$600, and John isn't sure Jake is going to stick with the instrument long enough to justify spending that kind of money on the instrument. The music store offers him a lease-to-own deal in which John pays $25 a month for the flute for two years and has the right to give back the flute at any time and end the contract. After the two years are up, he owns the flute.

Why it Matters:

Lease to own describes a situation in which a lessee leases an asset from the lessor and can become the owner of the asset after the lease term expires.