Question: What’s The Implied Interest Rate On Rent-To-Own Merchandise?

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Jul 10, 2015
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Activity, Behavioral Finance, Lesson Idea, Purchase Decisions, Current Events, Financial Scams, Excel Activities

This Consumer Reports video got me thinking about how this question can be structured as an activity to develop your students’ comparison shopping and Excel skills.  Here’s the video:

First, let’s get the comparison shopping out of the way.  I chose this washer-dryer pair advertised at one of the leading rent-to-own companies:

Screen Shot 2015-07-10 at 3.29.07 PM

How much would the washer-dryer pair cost if you could buy it upfront at this retailer?

Note the everyday low price noted on the top right (or Cash Price at bottom center) of $1,424.98.  I wanted to see how that might compare if you tried to buy the same Maytag Centennial Washer and Dryer at a “big box” retailer.  After a 30 second Google search, I came up with the following costs at one retailer:

Assuming that figures for rent-to-own and “big box” exclude taxes and delivery, the “big box” cash cost of $1,097 is 23% less than the cash cost at the rent to own.  Why is this important?  It shows that the rent-to-own customer is starting out with a handicap as they will be renting an item at an already inflated price.

What is the implied interest rate with the rent-to-own model, using the data for this washer-dryer pair?

Here are the assumptions to put into the model:

  • Amount to borrow:  $1,425 (cash cost at rent-to-own)
  • Payment period:  24 months
  • Monthly payment:  $120 (I didn’t fall for the $119.99 special); note that this excludes tax

I created this spreadsheet (Note: Please make a copy of the spreadsheet before sharing with students) where students can adjust the interest rate assumption while trying to zero out the ending balance in month 24.

  • If the Ending Balance in Month 24 is negative, then they need to increase the Interest Rate assumption.
  • If the Ending Balance in Month 24 is positive, then they need to decrease the Interest Rate assumption.

Spoiler alert:  The answer is about 87%!!!!!

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Questions:

  • How many months would the consumer need to save $120 in order to buy the same washer and dryer at a big box store?
  • Why do you think a consumer would be willing to pay very high interest rate with this rent-to-own model?
  • What would the assumed interest rate be if the consumer used the “big box” cost as the amount borrowed instead?
  • What advice would you give someone considering using a rent-to-own store?

_________

Here’s another Rent-to-Own mini-activity using TVs instead of washer dryers!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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