Kmart offers a lease-to-own program targeted to low-income consumers and is taking some heat over it. Rent-to-own is not new— chains such as Aaron’s and Rent-A-Center have been around for years—but it is new that a mainstream retailer has moved into this market. Kmart’s parent corporation, Sears Holdings, launched a similar program, and according to a company executive, it is satisfying the unmet needs of new customers. Some critics say that it is just encouraging instant gratification and exploiting disadvantaged consumers. These types of customers don’t qualify for credit and don’t have enough cash to purchase desired products outright, such as televisions and other big-ticket items. However, a $300 TV purchased through Kmart’s program ends up costing consumers $415 if purchased at the end of the lease. If customers make just minimum payments over the course of the lease, one expert calculated, that it is equivalent to charging a 117 percent annual interest rate. Sears spokespeople defend their service as being better for consumers compared with other rent to-own options because the retailer does not mark up the price of the product beyond the normal retail markup and limits the lease period to 18 months, whereas other national rental chains’ prices are much higher and leases can run two to four years. Are Sears and Kmart exploiting disadvantaged consumers? Explain why or why not.
Kmart offers a lease-to-own program targeted to low-income consumers and is taking some heat over it. Rent-to-own is not new— chains such as Aaron’s and Rent-A-Center have been around for years—but it is new that a mainstream retailer has moved into this market. Kmart’s parent corporation, Sears Holdings, launched a similar program, and according to a company executive, it is satisfying the unmet needs of new customers. Some critics say that it is just encouraging instant gratification and exploiting disadvantaged consumers. These types of customers don’t qualify for credit and don’t have enough cash to purchase desired products outright, such as televisions and other big-ticket items. However, a $300 TV purchased through Kmart’s program ends up costing consumers $415 if purchased at the end of the lease. If customers make just minimum payments over the course of the lease, one expert calculated, that it is equivalent to charging a 117 percent annual interest rate. Sears spokespeople defend their service as being better for consumers compared with other rent to-own options because the retailer does not mark up the price of the product beyond the normal retail markup and limits the lease period to 18 months, whereas other national rental chains’ prices are much higher and leases can run two to four years. Are Sears and Kmart exploiting disadvantaged consumers? Explain why or why not.
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