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:
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%!!!!!
- 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?