How to use the rent to own total cost calculator
- Enter the cash price of the item, how often you pay and the amount of each payment.
- Enter the number of payments it takes to own the item.
- Open the advanced options if there is a fee at the start or an add-on, such as a damage waiver, in every payment.
- Read the total you pay, the cost above the cash price, and the yearly interest rate that cost implies.
Formula
total paid = fee + number of payments x (payment + waiver)
cost above cash price = total paid - cash price
cash price - fee = sum of (payment + waiver) / (1 + r)^k for k = 1 to n
yearly rate = r x payments per year, effective rate = (1 + r)^payments per year - 1
The rate r is found by repeated halving until the payments are worth the amount financed to a very fine step. It is the same idea as a spreadsheet RATE function.
24 monthly payments on a $3,225 item
An item with a cash price of $3,225 can be rent-to-own for 24 monthly payments of $156.99. The total is 24 x $156.99 = $3,767.76, which is $542.76 above the cash price, or 16.8% extra.
The monthly rate that makes 24 payments of $156.99 worth $3,225 today is 1.2837%. Times 12 that is a yearly rate of 15.40%, and compounded it is 16.54% a year. Add a $4 monthly waiver and a $30 fee and the total rises to $3,893.76.
Why show the rate
A rent-to-own price is usually quoted as a payment, so the cost of the credit is hidden. Turning the payments into a rate lets you compare with a loan, a card or a store plan. The rate is only meaningful if you make all the payments. Many people end the agreement early and pay less, but then do not own the item.
Compare the result with the APR Calculator for a regular loan and the Loan Calculator for the payment on the cash price at an ordinary rate. The Add-On Interest Loan Calculator covers plans quoted as a flat charge.
What the fees do
A waiver or a start fee raises both the total and the rate. The tool shows the rate with and without the waiver when you enter one, so you can see how much of the cost comes from that add-on. If the add-on is optional, ask whether you can decline it.
Assumptions and limits
- Payments are made at the end of each period, so the first one comes a full period after delivery.
- The item is delivered at once and you make every payment on time.
- Late fees, taxes, early buyout offers and repair terms are not modeled.
- The rate is a nominal yearly rate (the period rate times the periods) and an effective rate that compounds it.
- The result is for comparison only; the contract terms control, and this is not legal or financial advice.
Frequently asked questions
How is this different from a loan APR?
It is calculated the same way, from a stream of payments against an amount received, but it is not a legal APR disclosure. The contract states the figures that apply.
What does Not above zero mean?
The payments add up to no more than the amount financed, so there is no interest cost to express as a rate.
Does the cash price include tax?
Use the same basis for the cash price and the payments. If one includes tax and the other does not, the rate will be off.
What if I buy out the agreement early?
This tool assumes all payments. For an early buyout, compare the buyout price with the cash price directly.