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.