diff --git a/backend/services/refundService.js b/backend/services/refundService.js
index 49a86f3..1198544 100644
--- a/backend/services/refundService.js
+++ b/backend/services/refundService.js
@@ -93,8 +93,12 @@ class RefundService {
       };
     }
 
-    // Check payment status - allow cancellation for both paid and free rentals
-    if (rental.paymentStatus !== "paid" && rental.paymentStatus !== "not_required") {
+    // Allow cancellation for pending rentals (before owner approval) or paid/free rentals
+    const isPendingRequest = rental.status === "pending";
+    const isPaymentSettled =
+      rental.paymentStatus === "paid" || rental.paymentStatus === "not_required";
+
+    if (!isPendingRequest && !isPaymentSettled) {
       return {
         canCancel: false,
         reason: "Cannot cancel rental that hasn't been paid",
diff --git a/backend/tests/unit/services/refundService.test.js b/backend/tests/unit/services/refundService.test.js
index d0a7205..8bd7e4a 100644
--- a/backend/tests/unit/services/refundService.test.js
+++ b/backend/tests/unit/services/refundService.test.js
@@ -277,8 +277,9 @@ describe('RefundService', () => {
     });
 
     describe('Payment status validation', () => {
-      it('should reject cancellation for unpaid rental', () => {
-        const rental = { ...baseRental, paymentStatus: 'pending' };
+      it('should reject cancellation for confirmed rental with unpaid status', () => {
+        // Confirmed rentals require payment to be settled
+        const rental = { ...baseRental, status: 'confirmed', paymentStatus: 'pending' };
         const result = RefundService.validateCancellationEligibility(rental, 100);
 
         expect(result).toEqual({
@@ -288,8 +289,8 @@ describe('RefundService', () => {
         });
       });
 
-      it('should reject cancellation for failed payment', () => {
-        const rental = { ...baseRental, paymentStatus: 'failed' };
+      it('should reject cancellation for confirmed rental with failed payment', () => {
+        const rental = { ...baseRental, status: 'confirmed', paymentStatus: 'failed' };
         const result = RefundService.validateCancellationEligibility(rental, 100);
 
         expect(result).toEqual({
@@ -311,6 +312,31 @@ describe('RefundService', () => {
       });
     });
 
+    describe('Pending rental cancellation (before owner approval)', () => {
+      it('should allow renter to cancel pending rental even with pending payment', () => {
+        // Pending rentals can be cancelled before owner approval, no payment processed yet
+        const rental = { ...baseRental, status: 'pending', paymentStatus: 'pending' };
+        const result = RefundService.validateCancellationEligibility(rental, 100);
+
+        expect(result).toEqual({
+          canCancel: true,
+          reason: 'Cancellation allowed',
+          cancelledBy: 'renter'
+        });
+      });
+
+      it('should allow owner to cancel pending rental', () => {
+        const rental = { ...baseRental, status: 'pending', paymentStatus: 'pending' };
+        const result = RefundService.validateCancellationEligibility(rental, 200);
+
+        expect(result).toEqual({
+          canCancel: true,
+          reason: 'Cancellation allowed',
+          cancelledBy: 'owner'
+        });
+      });
+    });
+
     describe('Edge cases', () => {
       it('should handle string user IDs that don\'t match', () => {
         const result = RefundService.validateCancellationEligibility(baseRental, '100');
@@ -528,6 +554,40 @@ describe('RefundService', () => {
       });
     });
 
+    describe('Pending rental cancellation (before owner approval)', () => {
+      it('should process cancellation for pending rental without Stripe refund', async () => {
+        // Pending rental with no payment processed yet
+        mockRental.status = 'pending';
+        mockRental.paymentStatus = 'pending';
+        mockRental.stripePaymentIntentId = null;
+
+        jest.useFakeTimers();
+        jest.setSystemTime(new Date('2023-11-28T10:00:00Z'));
+
+        const result = await RefundService.processCancellation(1, 100, 'Changed my mind');
+
+        // No Stripe refund should be attempted
+        expect(mockCreateRefund).not.toHaveBeenCalled();
+
+        // Rental should be updated
+        expect(mockRentalUpdate).toHaveBeenCalledWith({
+          status: 'cancelled',
+          cancelledBy: 'renter',
+          cancelledAt: expect.any(Date),
+          refundAmount: 100.00,
+          refundProcessedAt: null,
+          refundReason: 'Changed my mind',
+          stripeRefundId: null,
+          payoutStatus: 'pending'
+        });
+
+        expect(result.refund.processed).toBe(false);
+        expect(result.refund.stripeRefundId).toBeNull();
+
+        jest.useRealTimers();
+      });
+    });
+
     describe('Error handling', () => {
       beforeEach(() => {
         jest.useFakeTimers();