Jul 10, 2015

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

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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

⟶ Our Budget or Bust Case Study from our Budgeting Unit will work well with this post.


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:

  • Washer: $548
  • Dryer: $549

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%!!!!!

——————–

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!

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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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