Tuesday, December 1, 2009

Rent-to-Own

I received a particularly irritating advertisement in the mail over the weekend: the offer to pay $25 a week for 78 weeks in exchange for this laptop.

25*78 = 1950. That's a really high implied interest rate. In fact, a 91% yearly interest rate would be consistent with exactly *half* the monthly payment on the mortgage of the purchase price from the link above, as computed here.

And people think payday loans are robbery (I'm not conversant on the literature, but my impression seems to be they don't deserve all the bad rap they get).
I cannot accept any calibration over discount or interest rates in which this becomes a rational move for anyone and sincerely hope that they don't actually do business on these machines, but the flyer had a whole page dedicated to this 78-month rent-to-own plans.

9 comments:

Anonymous said...

Huh... don't approach this as if in a world with perfect monitoring and commitment and then go to preferences.

Different households have different default risks, to say the obvious.

Andrew said...

I agree with that, but if the household defaults, the item in question returns to the renter.

I concede laptops would probably depreciate substantially in a short period of time, though, and I have no idea how costly repo is.

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