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Monday, March 17, 2008

Beginning Instruments - Leasing or Rent-to-own

by: George Fetter

Parenthood is a continuous series of new experiences that often create confusion as parents negotiate unfamiliar territory. Finding an instrument for their child is often one of those experiences. The decision to buy an instrument from a chain discount store or over the internet rather than getting one from an established music dealer is confusing for most adults. After all, a trumpet is a trumpet, a violin is a violin in the novice’s mind. If the decision is to secure the instrument from a music dealer another problem often presents itself as the parent shops for the best value, do they lease or rent?

Over the twenty-five years I have headed the school service department I have often been asked, “What is the difference, between renting and leasing an instrument?” These terms are often used interchangeably and this adds to the confusion. It can be bit like, “Who’s on first?” The difference between leasing and renting an instrument is not so subtle when it comes to parents’ wallets.

Simply put, when a parent leases an instrument they are paying to use the instrument for a fixed number of months and then either turn it in at the end of the contract period or extend the contract period without applying any or little of the lease fees to the purchase of the instrument if the parent eventually decides to purchase one for the child. The contract period may include a significant down payment and interest fees followed by monthly payments similar to a car lease plan. This forces the parent into a decision after the initial lease period, should they buy an instrument or continue paying into a lease plan that is not building equity? If they do decide to buy, they may be faced with another three years of payments. This can foster increased drop-out rates from the first year to the second and beyond.

With a rental plan (generally called a rent-to-own plan), parents pay an initial contract fee usually equal to the first month’s rent and continue monthly payments which apply to the eventual purchase of the instrument minus any maintenance fees. Some rental fees may include a carrying charge of some sort based on the unpaid principal. Generally, rent-to-own contracts include a discount on the unpaid balance if the parent wants to pay off the contract early. A rent-to-own contract may be terminated at any time. An added feature of many rent-to-own contracts is the ability to apply a percentage of the equity in the first instrument toward a better instrument (100% with Marshall Music). The advantages to this plan are:

· Payments are building equity toward the eventual purchase of the instrument

· Parents are not forced to make a decision at the end of a specified contract date

· Parents can save on the total price of the instrument if they choose to pay off the balance early

· Parents have an incentive to buy a better instrument for their child since a percentage of the investment in the beginning instrument can be applied to a step-up instrument

· Reduces drop-outs since there is not a cut-off date for the contract

Leasing an instrument can appear to be a better deal to parents since they generally carry lower monthly lease fees due to a higher initial first payment, but after doing the math you will find leasing is more expensive, especially if the parent decides to purchase an instrument after the first year and realizes all those payments will not apply to the purchase of an instrument.

The advantage of a lease plan for the music dealer is it saves capital. By recycling the same instrument through the lease plan year after year there is a reduced need for inventory and the dealer can recoup his investment in an instrument several times. If the parent does decide to buy an instrument at the end of the lease (say nine months) the parent is starting all over again and the dealer has nine months of payments and the initial lease fee in the asset column.

At first look a lease agreement might appear attractive to a parent who is concerned with committing to a rent-to-buy contract that will take 28-36 months to purchase the instrument for a child who is, “Trying band or orchestra for a year.” After all, they only have to sign a nine month to year lease, put down an initial payment with smaller monthly payments than the rental plan. The reality is, for the majority of those whose child will continue in the program, parents are better off with the rental plan because the payments they make in the first year are applied to the purchase of the instrument. In addition, should the child decide to discontinue in the program prior to the instrument being paid off the parent can opt out of the contract at any time with no penalty.

When it comes to providing an instrument for the beginning student, purchasing from a discount chain, leasing or rent-to-own, the answer to, “Who’s on first,” is rent-to-own. It is in the best financial interest of the consumer. It provides a quality instrument that is gaining equity which can also be carried over to a step-up instrument for the advancing student musician.

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