What is it we don't know?, page-45

I shoehorned this post into this thread, because I had the material at hand (I tend to write things down for my own use when I look into issues), and the material may cover some things that readers may not have realised.

Over the years, I have occasionally looked at TGA's rentals for refrigerators, because it is easy to find their discounted prices and Recommended Retail Prices (RRPs). Because there was much written about rentals being Consumer Loans in disguise, I would check if the advertised rentals exceeded imputed interest rates legislated for Consumer Credit Contracts, ignoring the additional establishment charges that apply for so-called Small Amount Consumer Credits (SACCs), and Medium Amount Consumer Credits (MACCs).

The advertised TGA rentals that I checked, were always less than the maximum would be if RRPs were used as the Base Price, and the imputed rentals were derived as though they were repayments of small loans, which have an interest rate cap of 4% a month on the Principal for the repayment term. To use a clarifying example, current legislation allows a $1,200 loan for a 2-year term to attract a maximum repayment of $1,200 + $1,200 x 48% x 2 = $2,352. If this were repaid weekly, the repayments would be about $22.615 a week, which would probably be rounded down to $22.61.

If you want to poke around with different Principals (P), different Interest Rates (R) and different Terms (T), the Weekly Repayment (W) is W = P(1+TR)/52T. So $1200 to be repaid weekly over four years would be about 1200(1+4x.48)/208 = $16.846 per week. In spreadsheets the calculation is 1200*(1+0.48 *4)/208. You can manipulate this to create a formula for deriving the interest rate to be R = 52W/P -1/T. Hence, using the above example R = 52 x 16.846/1200 – 1/4 = 48%. In spreadsheets the calculation is 52*16.846/1200-1/4, or to avoid confusion (52*16.846/1200)-1/4.

The consequence of the above is:

1. For major items that TGA rents, the move to treat leases on a par with consumer loans was not a significant threat to TGA's business based on 3- or 4-year leases. I never checked 2-year leases.
2. Point 1 removes a significant part of TGA's business from risks of litigation based on overcharging rental payments. Breaching Responsible Lending caps relative to customers' financial circumstances is a different matter, but ASIC covered that.
3. The interest allowed for SACCs and MACCs, and proposed for Consumer Leases is generous, so these are not an issue, because the relevant pressure come from competition, not the legislated imputed interest caps.
4. The mathematics mentioned earlier allow a company to follow what it thinks is the best compromise between choosing a Base Price and a desired rate of interest. A firm that sees itself as being substantially a discount retailer would opt for a Base Price that is low relative to RRP, and select an interest rate that is high relative to the maximum allowed to cover the extra hassle and risk.

In regard to Point 4, if one looks at At https://www.betta.com.au/kelvinator-refrigerator-top-mount-460-litre-451402, a fridge with an RRP of $1,099 is advertised for $728, but rented at “from $11.05 a week”, so we do not know what it would transpire to be. It is probably a 3-year lease. To get from the Base Price to $11.05 a week in a 3-year lease requires an imputed interest rate of 45.6% per year, using the formula mentioned above.

TGA offers a similar fridge at $14.99 per week for three years, or $9.99 per week for four years. If TGA uses 45.6%, which is unlikely, then its Base Price would be about $988 for a 3-year lease, and $736 for a 4-year lease – a disjoint that tells us that TGA does not derive its pricing for any specific item using only a common-per-item Base Price and a common per-year Imputed Interest Rate. TGA would derive weekly rental rates via in-house criteria, with RRP and 48% per year interest as high-end constraints. I would guess that the criteria used has a common Base Price per item, applies a constant percentage-calculation formula that includes discounts for longer terms, and adds in other expenses in a formulaic fashion.

Currently, Consumer Leasing companies do not have to provide a Base Price, but I anticipate that this could be legislated in future.