As many as 80% of car shoppers have credit too poor to lease or purchase vehicles through traditional means, giving the concept of RTO automobiles a jump start.

Rent To Own industry veteran Fred Pearson opened the first rent-to-own automobile lot in Arkansas.

The $6 billion rent-to-own industry thrives by making unaffordable merchandise affordable to customers via flexible payments and a return-it-at-any-time philosophy. So if you can make a living by renting-to-own ovens, why not extend that business model to used cars?

That’s the question that RTO industry veteran Fred Pearson found himself asking before he opened his first rent-to-own automobile lot in Arkansas.

“I’ve learned never to say no about renting something until I’ve had a chance to really examine the potential,” says Fred Pearson, former co-owner of Furniture and Appliances Now, Arkansas’ largest independent RTO chain.

“RTO has always been an easy way for customers to obtain something which they didn’t have enough money for right away. A car is a huge expense and an absolute necessity in our society – much more than a television, or a stereo, or a sofa. I’d give up my sofa before I gave up my car.”

Pearson appears to have hit both a nerve and also a need with rental customers. He sold his stake in the Furniture and Appliances Now chain to co-owner Geron Vail in October 2005 so that he could focus on building his growing network of RTO auto lots. But before the sale, Pearson saw first-hand how well the concepts worked together.

“The furniture store fed the auto store from Day One. We definitely attracted some new customers who wanted to rent cars, but most just added a car from us as another item. These are customers who understand the rental transaction, and who liked that they could walk away without any hit to their credit report. Plus, we offered the same lifetime reinstatement benefit on our cars that we offer on any item in FAN, so they felt comfortable with their decision to rent. I’ve learned that you can leverage a good relationship into offering all kinds of different products. Cars, however, are a natural extension of something people need and will rent. This is a huge opportunity for RTO dealers.”

Pearson had been toying with the idea of rent-to-own automobiles but felt there was a missing piece to the equation.

“I was sold on the concept of renting-to-own cars, but I couldn’t figure out how to avoid liability if the customer defaulted on their car insurance while they were renting the vehicle. I first learned about Southeast Auto Rental Dealers Association (SEADRA) through the Arkansas Used Car Association. SEADRA was the safety net if a customer defaulted on their insurance and that was the final piece I needed to jump into this business.”

In fact, before a customer ever leaves one of Pearson’s lots they must provide proof of insurance that lists his company as an additional insured party. That way, when the renewal comes up Pearson’s staff is notified. Should a customer default on their car insurance while in possession of the vehicle, SEADRA’s insurance coverage kicks in, protecting the dealer from any repercussions.

One of the keys to Pearson’s success is setting up customers’ payments according to their pay cycle. The majority of payments are made bi-weekly, and average about $350 - $380 per month. Once a payment is made either on-site or via phone, the customer is given a code to enter into the starter-interrupt device installed on each vehicle. This device will beep on the day a payment is due, as a reminder to the customer. Should the customer default on his or her payment, after a predetermined grace period, the car simply won’t start. Since ownership of the car is retained by the car lot it’s easy for the dealer to reclaim the vehicle.

There are other benefits that dealers should consider, as well. Since the transaction is not a sale, there is no up-front tax collected or paid. Taxes are calculated on a cash basis and not an accrued basis, so dealers only pay tax on the payments they collect and not what they have the potential to collect.

Needless to say, Pearson is happy with his choice to leave sofas behind for the automotive business. “This is a big opportunity for rental dealers. Most of the dealers I know have worked hard to develop strong relationships with their customers. They have poured themselves into their business over the years and the customers trust them. SEADRA’s program provides a chance for dealers to offer a product customers need and provide it with the type of customer service that has made them successful in the traditional rent-to-own industry. Offering rent-to-own automobiles is a natural progression if a dealer can find and hire that ‘car person’ and leverage their existing customer base into a great opportunity.”

Contact:
Michael Garner, SEADRA
1-877-573-2372
www.seadraonline.com