What Is Lease-To-Own?

3 Ways This Emerging Alternative To Financing Option Benefits Retailers & Consumers

Brought to you by Katapult

Roughly 47% of the US population needs to finance a purchase of $400 or more, and half of the US has a FICO score below 700. These statistics indicate that a significant portion of the consumer population would benefit from and might be more likely to purchase when given the option to finance. But traditional financing is not for everyone—diversifying your offerings will allow more consumers access to your products. Lease-to-own, in particular, can be an appealing alternative to financing for younger consumers. 

New approaches to customer acquisition have seen a drastic increase during the pandemic—financial uncertainty during the crisis, as well as the rise of Gen Z as a valuable consumer segment, are both driving more need for change. New providers, including Lease-to-Own providers, give retailers greater access to a specific demographic whose purchasing power is relatively untapped: the nearly half of Americans in their 20s who dont have a credit card.

While many of the traditional "Buy Now, Pay Later" financing services offer loans for four- or five-figure purchases, with interest rates similar to those of credit cards, many retailers rely on more everyday purchases like mattresses and bedding that often cost more than $300 and exclude nonprime customers. Offering Lease-To-Own financing makes it easier for those retailers to connect with this consumer base.

What Is Buy Now, Pay Later? 

Young woman doing e-shopping at home

According to a recent Buy Now Pay Later (BNPL) study done by The Ascent, over one-third of U.S. consumers have used a BNPL service. That number has risen significantly over the past couple of years. Unfortunately, the study also found that only about one in five consumers who use these apps actually understand how they work.2

BNPL providers have traditional terms similar to credit cards, and are structured to break purchases into a few payments over a period of weeks or months (typically 6 to 36 months, depending on the provider). Most BNPL providers have interest-free periods—if the balance is paid-in-full before the period ends, the consumer can avoid paying interest. If the consumer doesn’t pay off the item within the interest-free timeframe, the BNPL provider will then charge them regular interest rates that are generally high. In most cases, BNPL providers do not check a consumers credit score to qualify them for the financing option at checkout and do not report on-time payments to credit bureaus. That said, some providers may report late payments or send the debt to collections, which may damage a consumers score.2 

What Is Lease-To-Own? And How Is It Different From Buy Now, Pay Later?

Unlike BNPL, Lease-to-Own (“LTO") is not at all connected to traditional financing and is not a way of issuing a line of credit to a customer. In fact, several LTO vendors will partner with a BNPL provider so retailers can offer an array of transaction types to their many customers.

African couple purchasing new furniture online, using credit card and digital tablet, just moved in new house, free space

With LTO, consumers typically have several paths to ownership for the product theyre leasing. With each payment, the customer has the option to continue leasing (typically for a bi-weekly or monthly period), buyout, or to return the item(s). A lease-purchase agreement offers consumers flexibility with no long-term commitment that may make it more attractive than financing. This flexibility also allows for the consumer to change their mind about a product without the retailer getting stuck with inventory. 

Typically, with LTO, the initial payment is made to the LTO provider, which then funds the participating retailer upon shipment of the item.

Reach A New Consumer Segment 

For retailers who sells products that cost $300 or more, having a lease-purchase option available often gives them more reach among new segments of customers. It also influences the number of transactions made because more customers can obtain what they need. From a consumer perspective, its an appealing option for someone looking to try out a product or who is hesitant to splurge. A LTO agreement allows them the opportunity to lease the product over a period of time with the option to return the item with no penalty or further obligation (other than lease costs already incurred) before deciding if they want to own it outright.

With LTO, Theres No Need To Process Returned Products 

LTO allows consumers who have no or evolving credit to obtain items they need through a lease-to-own agreement with the lease-purchase provider. There is no long-term obligation for the customer to continue leasing, and products are typically returned to the LTO provider, not to the retailer, with no further obligation other than amounts past due. 

It is a common objection that retailers do not want to receive returned goods and have to process them back into inventory. Luckily, in the LTO space, the goods are owned by the solution provider, therefore they are returned back to the lease-purchase company and not to the retailer. 

Offer Your Customers More Choice 

By offering both LTO and more traditional BNPL options, retailers provide their customers a variety of ways to obtain goods. The more convenient it is for the consumer to obtain what they want, the more likely it is for them to shop. 

Interested in learning more about how to provide LTO solutions to your customers? Katapult is a unique partner for retailers looking to offer their customers the option of LTO and see increased transactions. 

Visit katapult.com.


1: https://www.theatlantic.com/magazine/archive/2021/01/jeans-now-pay-later/617257/ 

2: https://www.fool.com/the-ascent/credit-cards/how-does-buy-now-pay-later-work/