Cash Rentals: What’s Your Appetite for Risk?

With the recent downturn in the economy and the credit squeeze, cash rentals are making a comeback of sorts. While the majors publicly shy away from the practice, it can be a significant percentage of revenue for car rental operators—if they can manage the risk.

“Cash rentals” cover rentals not secured with a credit card. That includes cash, debit cards and cashier’s checks. In terms of risk management, a renter who pays a cash deposit and ultimately pays for the rental using a credit card is still considered a cash rental.

Auto Rental News sought the opinions of operators to determine whether accepting cash deposits is worth the trouble and solicited their best practices on limiting loss.

How Much Business Is Cash?
“If a customer does not have a credit card, we’re just not going to rent,” says Monica May of Accessible Vans of America. AVA dealers rent wheelchair–accessible vans to the disabled, and the demand in that specialty market is such that AVA locations worry less about a customer taking his or her business elsewhere, May says.

With an upscale ski clientele, Dollar Rent a Car of Jackson Hole, Wyo., has no need to take cash rentals or debit cards, says Petti Riley.

Many independent operators, however, say cash rentals generate 20–40 percent of revenue, or higher. Fully 80 percent of the business at White Auto Rental Inc. of Glenolden, Pa., is from cash rentals, says Pat Downs. His views sum up much of the independent operator’s sentiment on the practice: “I feel [cash deposits] are great because they help me compete with the bigger rental companies,” he explains. “But it creates all the havoc in the world for me because I’m getting a type of customer that usually has bad credit.”

Downs estimates that as much as 60 percent of his cash deposit rentals turn into some sort of problem. Tom Purdy of Alaska Car and Van Rental in Ketchikan says his problem rate is about 20 percent. David Ward of Express Rent A Car in Grand Junction, Colo., does 25 percent cash rentals, and of that says he gets burned on just two out of every 100.

While renting with a credit card is always preferable, some say the problem rate is about the same. “We’ve been burned [by cash rentals], but no more than with a credit card or a debit card,” says Diane Kaderly of Rent A Wreck in Knoxville, Tenn.

Michael LaPlaca, a Washington, D.C., area attorney whose practice focuses on vehicle rental matters, says his clients’ cash customers have about the same loss history as credit card customers.

Nonetheless, for those problem rentals, operators say they rarely recoup the lost rental revenue or loss caused by a stolen or damaged vehicle. The deposit generally covers only a fraction of the bill. Moreover, most insurance companies don’t cover the damages that result from cash deposits.

The best outcome is usually being able to recover the asset as quickly and painlessly as possible after the problem arises. For this reason, operators make sure to put cash customers in an older, higher-mileage unit.

Debit Cards Can Also Be Risky
For Kerry Steele of Rent A Jalopy in Detroit, using debit cards provides “a better chance of being able to get your money because you can always go back and get more [if it’s needed].”

However, while initially the renter may have enough in his or her account to rent the vehicle, the situation could get messy when the renter does not return the rental on time and has no money left in the account. It is important to stress to customers using a debit card that the money—hundreds of dollars—is being pulled out of their account immediately.

The debit card client is still essentially a person with no credit, says Jim Tennant of the Tennant Group, a consultant to the vehicle rental industry. “A person with a debit card and no credit card is not going to be as good a renter,” he states. “He’s going to have more accidents and more problems.”

Credit Cards Not Failsafe
One benefit to cash payments, though, is the fact that the customer can’t charge back the rental as they can on a credit card. Renters can contest a rental charge with their credit card company, which can become an accounting nightmare for the RAC.

Further, LaPlaca says that state laws regulating car rental take a harsh stand against slamming the credit card used for a rental to collect for damage to the rented car—unless the customer agrees to the amount of the loss on a separate, post-accident charge ticket.

Credit cards have varying degrees of loss, identifiable by brand. A study conducted by Jim Tennant over a one-year period (see chart) shows that renters using American Express and MasterCard had the lowest overall loss of the major credit cards studied. When Montgomery Ward was still in business, its credit card fared the worst. Tennant reports that analysis of Sears cards showed a similar loss ratio.

Cash Customers: How to Qualify Them
For most companies, cash renters must provide a driver’s license with a current address, a utility bill or a pay stub that verifies proof of residency and employment and a verifiable phone number.

“They have to have a driver’s license and proof of car insurance, but you don’t have time to get their whole life history in five minutes and send them out,” Ward says.

Downs does accept customers that ask the company if they can put the rental in someone else’s name because they have no credit.

AVA policy allows a second party with a credit card to pay for the rental, but that person has to qualify in the same way. “Our qualifications may be a little steeper than anybody else’s,” says May. The company requires transferrable insurance (they don’t sell additional insurance products) and they also require, except in the state of Michigan, that all drivers must be 21. “We don’t make any other exceptions; our insurance won’t allow it,” May says.

Some companies go further in qualifying the customer. John Leadingham of Carolina Rent A Car in Charlotte, N.C., says his company charges an application fee for cash rentals. Renters also must be responsible for their own full coverage insurance. Additionally, the company runs a credit and criminal background check on the customer. “You would be surprised by the number of renters who have warrants or have pulled hard time,” he says.

CONTINUED:  Cash Rentals: What’s Your Appetite for Risk?
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