No more furniture, but plenty of debt.

Escaping the Rent-to-Own Couch

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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If you're poor, you're rarely going to get a great deal on anything you buy. Bad credit, no down payment, no place to put a bulk purchase -- all of these mean that you end up paying more for something than everyone else. This situation attracts a lot of journalists writing articles about the desperate prices the working poor pay for everything from furniture to cars.

The latest installment is this Washington Post piece on the "rent to own" furniture market. As credit shut down in the wake of the 2008 financial crisis, these outlets have thrived. Like the subprime loans and credit cards they replaced, they are a very expensive way to acquire anything. But if you haven't got many alternatives, they may look better than nothing.

The Washington Post highlights the reasons these outlets are so expensive: Customers are frequently unable to pay their bills. They make partial payments when they can, or they return the merchandise -- the manager the Post talked to says that an astonishing 75 percent of purchases are returned within a very short time. It might seem like this is a great deal for the store, because it can keep inventory low, selling the same sofa over and over. But by the same token, its labor costs are very high, for processing returns and chasing people who run away with the stuff instead of bringing it back. And it's not like it makes the same profit on a returned couch that it would have on one that was sold outright; it gets a partial payment, but it also gets whatever wear and tear the couch experienced sitting in a living room. These costs are what make all financial services to the poor much more expensive than the same services provided to the middle class.

The core problem is not the cost of rental furniture; it's the irregular income and, sometimes, the questionable financial planning that make it difficult for customers to pay. When work is unsteady and incomes are unstable, advancing money to the financially marginal gets especially risky. Which is to say, especially expensive.

Here's what especially struck me in the Washington Post article:

Nobody wants to buy items for amounts two or three times what they'd cost at a retail store. But when Abbott did her shopping in February, she didn't have the money to make even a small lump-sum payment for anything of decent quality, even on Craigslist. She couldn't buy via a layaway plan; Wal-Mart offers that option only during the holiday season. Perhaps she could have saved up the money on her own, but whenever she has tried to do so, her stash has been wiped out to handle daily needs.

You see this a lot in the annals of the working poor: People substitute debt for savings because it is too hard to accumulate savings in the face of demands on the money. This is especially true when your income is irregular, as it is for many of the people in the article. (You can see me talk more about that here.) Acquiring an obligation makes it much more likely that you will stick with the payments long enough to actually acquire the object, which is why people will pay nosebleed rates to borrow money or "buy" with plans such as rent-to-own.

The problem, of course, is that the irregular income that makes you partial to debt financing over saving is also the irregular income that makes you quite likely to default on your debts, trapping you in a high interest rate that is hard to emerge from. So while these articles are often framed around the size of the paycheck, it's worth noting that the irregularity of low-income paychecks can be just as big a problem.

Perhaps the reason we don't frame them that way is that it's hard to describe any sort of policy solution for paycheck irregularity. High interest rates and small paychecks at least have potential solutions you can name, such as usury laws and higher mandatory minimum wages. I don't favor those solutions, because I tend to think they do more harm than good, but at least you've got something to suggest in your "What is to be done" paragraph.

Irregular paychecks, on the other hand ... well, what do you do? Ban part-time work? Ban contracting? Either would be enormously destructive, both to the economy at large and to the people you are ostensibly trying to help. There's no feasible regulation that can force an employer to hire people for full-time jobs, and, if anything, our recent regulatory surge is pushing them the other way.

But just because we don't have a fix doesn't mean we don't have a problem. The decline of regular work at the bottom of the economy has major consequences for those workers, and it will shape all sorts of markets for years to come.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net