Once a piece of merchandise comes back to the store, how do you decide what to rent it for next time? Should you lower the term or lower the rate? In my travels to rental dealers across the country, I’ve seen this dilemma handled many different ways. Some dealers lower the term (length of rental to acquire ownership), others lower the rates, and there are even some who do both. So what is the best option?

What is the customer paying for?
First, let’s agree on one fact. Our customer is simply paying a fee for the use of the rental product. This has, after all, been our argument for years as to why rent-to-own should not be classified as a retail installment type loan. So if that is the case, how can you justify renting the same product to two different customers at two different rates? Both customers are, in fact, paying for the same thing, the use of the rented product. So how can we justify charging a lower rate to the renter of a pre-rented item? Quite simply, you can not. The same is true for dealers that offer multiple rates and terms. For example, offering a choice of higher rates at a shorter term in addition to the traditional rate and term. This practice also “blurs the line” between rental purchase and retail financing.

Agreement Cost
With that being said, there are other important considerations. For example, your cost of maintaining the account does not change simply because the item is pre-rented. You must still pay someone to deliver the pre-rented product, collect on the account and perhaps even service the pre-rented product. Additionally, your other operating expenses do not change as a result of renting a pre-rented product at a lower rate. So all things considered, adjusting the term makes the most sense.

Rule of Thumb
When it comes to lowering the term, there are other factors to consider. The condition of the pre-rented piece is obviously one consideration. But if the item shows only normal wear, what is a fair reduction in term. A good “rule of thumb” would be to reduce the term by 1 (one) month for every 3 (three) months rented. This practice allows a fair reduction of term while still moving the piece out of inventory before its service life is over.