Chapter 8 Consumer Purchasing Strategies and Legal Protection McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Financial Implications of Purchasing Decisions Commonly overlooked trade-offs when buying include…  Paying a higher price over time by using credit to buy items you need now.  Buying unknown, possibly poor-quality brands, that are less expensive.  Selecting brands that may be difficult to service or repair.  Ordering by mail or online to save time and money, but return or repair may be difficult.  Taking time and effort to comparison shop. 8-2

 Consumer prices  Interest rates  Supply/demand  Brand name  Warranty  Product Quality  Tax rates  Govt. regs. Economic Factors  Lifestyle  Culture  Attitudes  Ads  Media/Internet  Hobbies  Peer group Social Factors  Sex and age  Marital status  Occupation Personal Factors  Income  Education  Family size  Housing type  Ethnic group  Religion Consumer Buying Influences 8-3

Personal Consumer Protection To protect yourself as a consumer…  Deal with reputable companies.  Avoid signing contracts, documents you do not understand.  Be cautious about offerings that seem too good to be true - they probably are.  Compare the cost of buying on credit with the cost of paying cash. Compare interest rates the seller offers with other sources.  Avoid rushing to get a good deal. 8-4

Practical Purchasing Strategies n Timing purchases.  Be aware if the price varies with the time of the year. n Store selection.  Choice of retailer depends on location, price, product.  Cooperatives -non-profit organization; members save money. n Comparison shopping of store and national brands; avoid impulse buying (unplanned purchasing). n Look for information on label and open dating. 8-5

Practical Purchasing Strategies nPrice comparison.  Unit pricing provides a standard of measurement.  Coupons (online: coolsavings.com; centsoff.com; couponsurfer.com) and rebates (partial refund).  Convenience & ready-to-use products may mean higher prices. Large is not always the best buy, and “Sale” prices vary among stores. Evaluate warranties.  Full or limited express warranties, usually written.  Implied warranty of merchantability-fit for normal use. Service contracts -also called extended “warranties.” (continued) 8-6

Purchasing a Car: A Research-Based Approach - Phase 1: Preshopping Activities nProblem identification. nInformation gathering.  Personal contacts.  Media information-television, websites  Independent testing organizations- Consumer Reports  Government agencies.  Online Sources –

Phase 2: Evaluation of Alternatives Comparison shopping. Selecting vehicle options-convenience, appeal, etc. Comparing used vehicles Leasing an automobile 1) lower payments, small initial cash outlay 2) no ownership in vehicle 3) maximum # of miles/year; charged for extra miles. 4) know the capitalized cost of the lease, the money factor, the monthly payment, number of payments, and the residual value. 8-8

Phase 3: Determining Purchase Price Negotiation  Know necessary information about the product.  Deal with a person of authority to give you a lower price or additional features.  Used-cars: Check newspaper ads, Kelly Blue Book (  New cars: Set-price dealers, car-buying services n Compare financing alternatives.  Variety of lenders-some lenders may pre-approve you.  Avoid being upside-down in your car.  Look for rebates or low-interest financing.  Consider the APR, total finance charge. Check out

Phase 4: Postpurchase Activities n Lemon Laws. n Maintenance and ownership costs n Use the item correctly to have improved performance and fewer repairs. n Investigate, evaluate and negotiate a variety of servicing options. n Operation costs; fixed and variable expenses. n Automobile servicing sources; dealers, service stations, garages, Wal-Mart, etc. 8-10

The Used Car Inspection Process Outside the car. Inside the car. The engine.  Have a mechanic or technician of your choice estimate the costs of potential repairs.  Odometer fraud. The road test. 8-11

Buying a Used Vehicle Sources of used vehicles.  New-car dealers.  Used-car dealers.  Private parties.  Auctions, used car superstores such as CarMax, or online at sites such as or Consumer protection for used car buyers.  FTC buyer’s guide in window.  Buy from a source that gives some assurance of the vehicle’s reliability. 8-12

Used-Car Price Negotiation Price information sources  Edmund’s Used Car Prices or edmunds.comedmunds.com  NADA Official Used Car Guide.  Kelly Blue Book kbb.comkbb.com The more new cars sold the more used cars there are for sale, keeping the prices down. 8-13

Gathering Information Sticker price - suggested retail price. It includes the base price of the vehicle plus accessories. Invoice price - dealers cost. Know the dealer’s cost by consulting...  Consumer Reports  Edmund’s New Car Prices Buy in winter, early spring or end-of- month. 8-14

Selecting Options Mechanical devices.  Engine size, transmission, power steering,cruise control, and antilock brakes. Comfort and convenience options.  Power seats, air conditioning.  Stereo systems, power locks. Aesthetic features.  Special paint.  Mag wheels. Service contract - look for costs and exclusions. 8-15

Determining a Purchase Price Price bargaining - compare dealers. Set-price dealers. Car buying services.  Also called an auto broker. $50-$200 over dealer’s cost. Online car buying  or autoadvisor.com. The sales agreement - specific details. Consumer protection for new-car buyers.  Warranties and lemon laws. 8-16

Financing an Automobile Purchase Financing sources.  Banks, credit unions, other financial institutions, finance companies, or dealer financing.  Get preapproved for a certain amount. Consider the length of the loan.  Upside down equity means that your car is worth less that what you still owe on your car loan. Check the APR and any rebates. 8-17

Leasing a Motor Vehicle Advantages.  Small cash outflow.  Lower monthly payments than buying.  Lease provides detailed records - helps if you use your car for business purposes. Disadvantages.  No ownership interest.  Must meet requirements.  May have additional costs for extra mileage, turning the car in early, or for certain repairs. 8-18

Types of Leases Closed-end.  You return the car at the end of the lease and pay for any extra mileage or damage, but you are committed for the full lease term. Open-end.  Easier to terminate the lease, but you have higher lease payments and they may require you to pay for the difference between the expected value of the leased vehicle and the amount for which they sell it. Single-payment - prepaid, discounted lease. 8-19

Financial Aspects of Leasing Capitalized cost - the price of the vehicle. Average buyer pays 92% of list, average person who leases pays 96% of list. Money factor - interest rate. Monthly payment amount and number of payments. Residual value - expected value of the vehicle at the end of the lease. You may decide to return, keep, or sell the vehicle. If the residual value is less than market value, return it. 8-20

Financial Aspects of Leasing Avoiding lease traps.  Not knowing the total cost of the agreement, including the cost of the vehicle. Don’t just look at the monthly payment.  Making a larger up-front payment than is required, or paying unnecessary add-on costs.  Negotiating the monthly payment rather than the cost of the vehicle.  Not having the value of any trade-in vehicle reflected in the lease.  Signing a contract you don’t understand (continued)

Costs of Operating a Car Fixed Costs.  Depreciation is the largest fixed cost.  Interest on loan.  Insurance.  License, registration and taxes. Variable Costs.  Gas and oil.  Tires.  Maintenance and repairs.  Parking and tolls. 8-22

Costs of Operating a Car Keep good expense records. Follow the maintenance schedule in the manual. Vehicle servicing options.  Car dealers.  Automobile repair shops.  Service stations.  Department and discount stores.  Specialty shops such as oil/lube, muffler, transmission, and tire shops  Be alert for signs of fraud (continued)

Resolving Consumer Complaints  Return to place of purchase.  Contact the company’s main office to get company hotline; Another option is a firm’s website –  Obtain assistance from a consumer agency.  BBB provides pre-purchase information.  Mediation - third party negotiates (nonbinding)  Arbitration - decision is binding.  State consumer protection office or agency.  Federal agencies - see Appendix B in text. 8-24

Steps in Resolving Consumer Complaints  Take legal action - options for consumers...  Small claims court.  Class action suits.  Using a lawyer.  Other legal alternatives. Legal aid society. Prepaid legal services. Legal questions can be researched at (continued) 8-25