Effective interest rates

I thought I had better check out Crazypunter’s assertion  that Radio Rentals are effectively charging “almost 100%” interest on the package of goods and service that they provide. (14/9/15) (http://hotcopper.com.au/posts/15988030/single)
That begs the question of where are the excess profits that such high margin business ought to be generating?

In any case, I have attempted a somewhat more detailed, albeit still crude, version of Cp’s price comparison, taking into account that RR continue to own and maintain the appliance until the end of the term, and furthermore, that the customer can put the item back to RR at any stage without further obligation. Rather than look at a Thorn branded item, which has no exact external equivalent, I considered known brand items, which can be purchased elsewhere. The assessment necessarily requires assumptions about the RR business.

I considered a 10kg top loader LG washing machine. Hardly Normals are advertising it for $1199, which with a 4 year product care warranty and $49 delivery adds up to $1487.95. RR appear to be offering the same new item for $15.99/w and I understand this comes with the option for the customer to purchase the item for $1 at the end of a 48 month term. To allow for the cost involved if the customer puts the item back to RR I allowed that that would entail a $250 fixed cost for transport cleaning and restocking, with a 20% probability of that occurring in any one year. (In reality the risk of the item being put back would likely be high at the start and diminish towards the end of the term as the customer comes within reach of ownership. Also, for the sake of simplicity in the calculation and assumptions, I assume that, if the appliance is put back, the item is immediately let out for the remainder of the original term, whereas, it appears that RR let out used items out for another full 48 month term, but at a reduced rate.) I allowed a 2% charge for the ordinary risks of fire, flood, tempest and theft, which I assume that RR bears while they own the item.

When I do the calculations on these assumptions, the total cost of the goods and services provided over the 48 month term is $1763 and the effective annual interest rate implicit in the payments for those services is 41.8%. (In comparison, the Hardly Normals finance offering of 50 monthly payments of $33.73 works out to a modest interest rate of 8.03%PA.)

I repeated the exercise for a lower priced 7.5Kg Simpson top loader washing machine, where the RR offer includes a “$50 gift card”, which bulks the equivalent Hardly Normals price up to $937.95. RR offer it for $11.99/w. In that case, the total cost of the goods and service is $1187 and the annual interest rate is 52.9%. (Hardly Normals 50 month rate works out to 13.36%.) Obviously, different assumptions will vary the calculated interest rate. My assumptions about the risks and costs of items being returned may be wrong either way. The effective rates on lower value items offered by RR may be higher still: I have not checked that.

Evidently credit card rates, which are still usurious, would be a better deal for customers, but I suspect that RR are catering to people who do not even have access to credit card finance. Self evidently the high rates implicit in the RR deals must reflect a high incidence of default of one sort or another, otherwise TGA share holders would be rolling in money, which last time I looked, doesn’t apply to me.

On this analysis, it appears that, in effect, the RR deals approximate to the existing 48%PA pay day lending rate cap. Thus it appears that if the pay day rate cap was legislated to apply to the RR model, complicated though that would be, it might not make much difference to their business. It stands to reason that the implicit RR interest rate would have to be competitive with pay day lenders rates otherwise their customers would go to the pay day lenders instead.

I confess to being surprised at how high the effective interest rates seem to be. I am not exactly sanguine about owning shares in this sort of business, but I am also cognizant of the fact that this type of “lending/service provision” will not stop if the formal providers are regulated out of existence. I would rather they go out of business through a lack of customers, but I doubt that will happen any time soon.

Thoughts, corrections, brick bats? (This is not advice on appliance shopping or finance)