Hello Susan,
in the other thread you wrote:
Sounds to me as if you were better off getting a loan from a bank, pay the ramp in one payment from that money, and pay back the loan in monthly payments.
Because otherwise it simply means an interest rate of 25%, and i think that a regular bank is lower than that.
Unless, of course, the renting includes free service/repair for the whole time until fully paid, then it might be worth it, if you expect lot's of repairs and service to happen.
Just my two cents...
Greetings,
Chris
Your math is wrong. For simplicity assume 12 payments of roughly $266 where $200 (75%) goes towards a $2,400 ramp. That's almost $800 in "interest", which is a 56% annual interest rate. You might think it's a 33% interest rate (800/2400), but that would only be true if you made one lump sum payment. In a "real" loan the ratio of interest to principal changes with each payment. In Rent to Own it remains constant.
A 25% loan would have a payment of $228 for 12 months resulting in $337 in total interest.
One advantage of the Rent to Own deal is if she thinks she only needs the ramp for a short period of time but there's some risk that she might need it longer. Keeping with our numbers, suppose she only needs it for three months and goes the Rent to Own route. She will be out of pocket for about $800. They take the ramp back.
With a "real" loan she's on the hook for the full $2,737 in principal and interest no matter what. She will end up with a ramp at her home. If she sells it for more than $1,950, she will come out ahead by taking out our hypothetical 25% loan. If she sells it for less, then Rent to Own was a better deal
under those circumstances.
Suppose after three months she realizes that she needs it for much longer. She can still take out a loan. She only needs to borrow $1,800 because the company is counting $600 of the $800 she already paid as principal payment.
If she takes out a 9 month loan her payment will again be $228. She'll pay $259 in loan interest plus the $200 in "lost rent" for an effective rate of about 43%. Once again she will own the ramp and may be able to sell it at some point.
Conclusion: If you think you're going to need the ramp for more than a few months, taking out a loan and buying is better financially. Without knowing the specifics of the monthly rental rate, loan interest rates, and resale values of ramps, it's not possible to give an exact number of months.
