Tire Rentals

The latest twist on the rent-to-own schemes seems to be car tires, as reported by Ken Bensinger in the L.A. Times. Consumers end up spending many times more "renting" car tires than the cash price at Wal-Mart. Obviously, the transactions are principally just incredibly expensive ways to finance the purchase of tires, which makes me wonder why the businesses involved in the market are offering tire rentals instead of  just  expensive credit. People in dire financial straits will take extraordinary steps to get the necessities of life, including tires, but I wonder why calling it a "rental" rather than a "loan" seems to matter. Although a few Google searches suggested the market for used car tires is more robust than I would have thought, it would not seem likely that the possibility of repossessing and reselling a used car tire is motivating the economics of the transactions.

Four overlapping possibilities come to mind:

(1) The idea of "renting" is more palatable to the consumer than "borrowing." Incurring debt remains laden with moral overtones that perhaps renting avoids. For this idea to be correct, many consumers renting tires would have to fail to see that it is essentially a way to finance the transaction. Or, maybe they realize it is the equivalent of financing, but believe "rental" is more palatable to friends and neighbors?

(2) The idea that the rental company still nominally "owns" the tires makes people more likely to pay because they feel a stronger intrinsic obligation to make payments on something that does not belong to them. These feelings are intrinsic and independent of the consequences of not paying.

(3) The consequences of not paying are that the rental company will come and take the tires. Do rental companies actually come on a regular basis and take the tires if customers who do not pay? Even if they do not, do consumers believe the rental companies will do so?

(4) The article discusses how in some states, such as California or Texas, the failure to return a "rented" tire may persuade the police the matter is a criminal one. Law enforcement authorities should, of course, ask themselves why they are letting these companies turn a civil matter into a criminal one. But, if police are willing to get involved, it is another reason why a high-cost lending transaction might be structured as a lease rather than a rental.

The tire rental business seems an obvious and thinly disguised financing scheme, more so than traditional rent-to-own businesses. Understanding why tires got structured as a rental rather than a loan may help better understand the consumer decision-making process in other high-cost loan products, which in turn will lead to better regulation. Maybe if former Credit Slips guest bloggerand University of Houston law professor Jim Hawkins (also quoted in the article) is listening, he might weigh in with his thoughts in the comments?

Hat tip to my colleague, David Hyman, for pointing me to this article.

Wheel and jack image from Shutterstock.

Comments

[Bill Gootman]

Hrm, maybe neo-mercantilists might read this and reconsider the "merits" of tire tariffs...

[Anon]

Renting might avoid usury laws?

[Ken Doran]

It is the good old rent-to-own scam, with this merchandise likely to be found in a public place for ease of repossession, and likely to cause great inconvenience when repossessed. Profit! Not much more analysis required.

[j syme]

Surely rental provides a ready cancellation option that is not normally available with a loan? That option must have significant value to consumers under financial stress.

[GSo]

Tax arbitrage? With rental you expence the tires in year one but taxable income is the rent paid. With selling on credit you also expence the tires but have to pay taxes on the full sales value of the tires pluss first year interest paid.
Could be that there is a sales tax/VAT arbitrage here as well, depending on local rules.

[Jim Hawkins]

Thanks for mentioning this great story Bob! It was interesting talking to the reporter because he explained that the real driver of the situation was the steep increase in the cost of rubber. Rent a tire places have been around for a long time, but they primarily rented/sold high-end tires. But because rubber costs priced people out of the market, now dealers are offering standard tires.

I don't know if it makes sense to call these transactions loans because as j syme points out, the customer can walk away at any point. It is hard for me to imagine that people feel more compelled to make payments when they have no obligation to do so just because someone else owns the property than they would if they had promised to pay back a debt.

I also think people think of rent-to-own as an option for the poor, so I am not sure that people would pick renting over purchasing on credit, but obviously that is an empirical question. I'd be surprised if people opt to rent because of social pressures.

My main thought is that we just need to be sure there are sufficient consumer protection measures in place instead of labeling the transaction as a loan or lease. In most states, there are rent-to-own specific laws. Perhaps these laws need to be changed in some way (like to address misuse of police for collection), but I don't think forcing this unique product into a pre-existing category is valuable. But, I've started wondering about this approach lately. I feel like I need to read about the uniform law movement and am curious about whether people think there is value in treating all transactions under the same law.

[SYSM]

Rent-to-own: in a great many states, if the debtor/"renter" fails to make a payment, all the store has to do is send out a letter, wait X number of days, and then forward the matter to the prosecutor to prosecute under a larceny statute. MUCH better than hiring some collections lawyer (far better rate of recovery, and the store doesn't even have to pay the lawyer, he's paid by you and me and all the taxpayers of the state).

Prosecutors hate this -- they don't like being used as collections agencies -- but the rent-to-own lobby is remarkably powerful.

[SYSM]

http://hamptonroads.com/2011/04/criminal-prosecutions-soar-renttoown-sector

A growing number of people who fall behind or disregard lease payments on household goods and do not return the merchandise are being charged with felonies by prosecutors, according to a Pilot analysis of Virginia Supreme Court data.

The number of cases completed in Hampton Roads courts has grown from about 70 in 2006 to more than 200 last year. Norfolk Circuit Court had the highest percentage of cases brought before the courts, statistics show. Some Virginia Beach cases from 2009-10 were not included in the supreme court data.

Some cases involve thefts of rental vehicles, but many were brought by rental and lease stores against customers who failed to make full payments and return merchandise. Some defendants, like Walker, were booked into jail. Merchants say customers who keep a flat-screen TV or furniture set without paying or returning the property are stealing. They say few customers end up being criminally charged. “We’re just using the tools available to us,” said John Schaller, owner of a local ColorTyme Rent-To-Own franchise.

[H]

Apparently one of the main reasons these tire "rentals" are structured that way is that if the "renter" goes bankrupt the tire company can still repo the tires while if it were a sale the debt would be wiped out and the consumer keeps the tires.

[Knute Rife]

No practical difference between this and secured interests in consumer good transactions such as everything R.C. Willey does. I've seen them repo tires, water heaters, mattresses, and a variety of other consumer goods.