Planning Your Financial Future, 4e by: Boone, Kurtz & Hearth Chapter 7 Transportation and Household Purchase Decisions

2 Introduction  25% of car buyers reported problems with buying a car Dealer not straightforward with price negotiations Sloppy prep of vehicle Pressure from salespeople  Purchase of household goods also elicited numerous complaints Defective goods Failure to honor warranties Deceptive advertising

3 How Households Make Purchase Decisions  You decide you want (need) something, like a new sofa Can you afford it? What type do you want (size, comfort, hide-a-bed, etc.) Review what’s available Do your research  Is it available at numerous places—are the prices comparable?  Is a financing plan available (and satisfactory)?

4 Figure 7.1: Steps in the Consumer Decision-Making Process Household goals Recognition of problem or opportunity Purchase decision Purchase act Evaluation of alternatives Postpurchase evaluation Personal influences Needs Attitudes Personality Previous experience Environmental influences Family members Friends and acquaintances Advertisements Sales representatives

5 A Model of Consumer Decision Making  How elaborate and formal the process is depends on What you’re going to buy How important the purchase is How often you make the purchase How expensive the item is  Major purchase decisions involve relatively complex decision processes

6 Benefits of A Step-by-Step Approach  Everyone impulse buys, but it’s better to not do this, because it is better to Have control, make a conscious decision, be organized  By following a step-by-step process you’ll probably be able to extend the purchase power of limited funds Take advantage of sales, etc. Can pay for purchases in least expensive way Avoid mistakes associated with impulse buying

7 Separating Needs from Wants  Need – something thought to be a necessity  Want – something you desire but it is unnecessary Example: If all you need to do with a computer is surf the Web and basic word processing, do you need a top- of-the-line computer? Wise consumers attempt to separate needs from wants prior to shopping  Decide how to fit the purchase into your budget

8 Table 7.1: Needs Versus Wants Worksheet

9 Your Rights as a Consumer  An informed consumer needs to know about fraud, sources of consumer assistance, etc.  Consumer fraud and abuse Mail and telephone frauds Home and auto repairs  Pay for major repairs when only minor work needed Deceptive advertising Deceptive sales practices and pricing  Place an item on sale to lure in shoppers, only to have the sale item ‘sell out’ quickly

10 Your Rights as a Consumer Identity theft  Someone steals your personal information and uses it to obtain credit cards, cash, or other loans  Protect yourself by Guarding ATM slips Destroying all preapproved credit card solicitations Regularly reviewing credit record

11 Sources of Consumer Assistance  Consumer Action Handbook  Better Business Bureaus (BBB) File complaint Seek info about business Independently operated, not-for-profit organizations Can only take action against a business that is a member  Only about half of businesses belong to BBB  Consumers Union Publishes Consumer Reports magazine

12 Sources of Consumer Assistance  Underwriters Labs (UL) Largest independent, not-for-profit, safety-testing organization in world Investigates products for fire, electric shock, etc.  Using the media If you complain to the media, corporation may take action (fix the problem) to avoid negative exposure  Selected federal agencies Federal Trade Commission, National Highway Safety Administration, FDA, etc.  Discussed in the Consumer Action Handbook  State and local government consumer protection services Regulate public utilities, health-care delivery, insurance practices, etc.

13 How to Complain and Get Action  Take the following steps Determine the problem exactly and decide how you want it resolved  Do you want your money refunded or a replacement product?  Have all the necessary documents on hand Contact the person who sold you the item and tell them the problem/proposed solution  If they can’t help, talk with their supervisor  Most complaints are resolved this way If you are not satisfied, write the company

14 Taking Third-Party Action  If you’re still not satisfied with actions taken, you can involve a third party Federal, state, or local consumer affairs or regulatory offices Private consumer organizations Media  If this doesn’t work, you can take the business to court Small-claims court – handles disputes involving small amounts of money—$1,000 or less

15 The Transportation Decision  About 11% of our money is spent on transportation Including insurance, gasoline, and other driving costs, maintenance, etc.  It’s the second or third largest expense a consumer will make

16 Do You Need a Car?  Average new car costs $20,000  Average American drives 13,500 miles per year ¾ of those miles commuting to/from work, grocery store, etc. In many cases, there are no other modes of transportation Over 90 percent of all workers commute by car Many residents of large cities find a car unnecessary  Congestion  Parking  Expensive

17 Do You Need a Car?  The cost of owning and operating an automobile Financing the purchase Maintaining the vehicle Car insurance Registration fees Fuel Depreciation

18 Figure 7.5: Breakdown of the Estimated Five- Year Ownership Cost of the Honda Accord Source: Based on data from IntelliChoice, accessed July 8, 2004.

19 How to Purchase an Automobile  Choosing the right car for you Make and model  Reputation Size and body style Options  Distinguish between your needs and wants Cost of ownership

20 How to Purchase an Automobile  Choosing the right car for you Desirable features include  Low mileage  Late model  Quality reputation Should also check  Tire wear  Condition of interior  Rust spots  Ripples in metal

21 A New or a Used Car? With the average new car price around $20,000, about 75% of car buyers are choosing used cars About ½ of used car purchases occur through private transactions (not through a dealer) Disadvantages include no financing through seller, no warranty, buyer must handle the paperwork of transferring ownership

22 Web Links LOTS of different web sites to help you determine a fair value for new and used cars

23 NADA Used Car Guide  Published monthly by the National Automobile Dealers Association  Shows current retail and trade-in prices for most domestic and foreign cars  Includes value of specific options and unusually low mileage  Available at most credit unions, banks, and some libraries and insurance agencies

24 Choosing a New-Car Dealer and Closing the Sale  Doing your homework Go to the dealership with the knowledge of the car’s invoice price so that you can compare that to the sticker price  Represents what the car cost the dealer  Negotiate by working up from the invoice price, not down from the sticker price  Arrange for financing before shopping for a car

25 Negotiate With the Dealer  You can always say ‘no’ and walk away  What’s a good deal? Paying $300-$500 above the invoice price is a very good deal (but for popular models be prepared to pay more)  Watch out for Extended service warranties (rarely worth the cost) Fees for preparing state-required paperwork (not really negotiable) Dealer-added ‘paks’ (such as rust proofing, paint sealant, etc.) (rarely worth the cost) Credit life insurance (pays off the balance of the loan should you die)  Very expensive, probably unnecessary

26 Tips for Negotiating with Car Dealers  Remain calm and don’t become too attached to the car (be prepared to walk away)  Don’t discuss trade-in value, etc. until you’ve arrived at a firm price for new car  Bargain up from invoice price, not down from sticker price  Be prepared to shop around  Be prepared to wait while the salesperson checks with manager  DON’T write a check for a deposit even if dealer says it’s refundable

27 Tips for Negotiating with Car Dealers  Don’t answer questions like How much can you afford to pay on a monthly basis?  Don’t focus on the monthly payment, focus on the price of the car—$1,000 spread out over 5 years isn’t that much, but it’s still $1,000  Read everything carefully before you sign  Shop around for car financing—don’t let the salesperson talk you into a lease Buying is usually the better alternative

28 Alternatives to Negotiation  Many consumers hate the negotiation process  Alternatives Use the Internet ( Some manufacturers (Saturn) have a strict, no-haggle pricing policy Cost-plus basis  Annual (or semiannual) car sales with credit union  Sam’s Club Have to arrange your own financing, may not be able to trade in  Car buying service – for a fee, service will get the best price it can on specific model Have to arrange your own financing, may not be able to trade in

29 What About Trade-Ins?  Determine the trade-in and retail value of your old car via the NADA Used Car Guide or online sources before shopping for a new car You’ll probably be offered the wholesale value—not the retail value  May be able to negotiate a better trade-in price if car is in good condition and is less than four years old  You’re probably better off, in terms of money, selling your old car yourself But have to contend with hassle and expense of advertising and dealing with prospective buyers

30 Warranties  Fairly standard warranty is 36 months or 36,000 miles, whichever comes first  Covers cost of repairing/replacing covered items (parts and labor)  ‘Bumper-to-bumper’ warranty covers everything except the tires for certain time period  ‘Power train warranty’ covers engine/transmission for additional time period after the expiration of the bumper-to-bumper warranty  Some features (such as seatbelts have a lifetime warranty)

31 Financing the Car Purchase  Decide how large a monthly payment you can afford or want to pay Rule of thumb: Car payment shouldn’t exceed about 20– 25% of your monthly take home pay Just because you can afford a large payment doesn’t mean you need that expensive of a car Many people have begun financing cars over longer time periods  Increases the amount of interest you’ll pay

32 Sources of Financing  Banks and credit unions Credit unions offer very competitive rates, low down payments, payroll deduction plans  Auto manufacturer’s financing subsidiary (such as GMAC) Convenient, have been offering more competitive rates recently  A used car loan generally carries higher interest rates, shorter terms, and higher down payment

33 Evaluating “Low-Rate” Financing Incentives  Auto manufacturer’s financing, subsidiary offers rates below market rates to entice buyers to finance with them Is this your best alternative?  Generally only for very short time frames (24 or 36 months)—you may not be able to afford the payment  May offer either a cash rebate or a low-rate loan— you may be better off taking the cash rebate and arranging your own financing

34 The Leasing Alternative  Leasing has become very popular with new-car shoppers (about 25% of new cars are leased) Is it worth it?  Supporters argue Little or no down payment More car for the money Lower monthly payments  Opponents argue At the end of lease you don’t own the car Typically less expensive to buy a car through financing rather than leasing

35 Example: Should You Lease or Buy?  You’ve negotiated a final price of $20,000 on the cost of financing a new-car purchase. If you buy the car you’ll pay $4,000 on down payment and finance the rest at 7% for 36 months. [Your monthly payment will be $494 and you’ll make a total of $17,785 in payments.] You think the car will be worth about 70% of the purchase price after 3 years. If you lease, you’ll pay a security deposit of $750 and make monthly payments of $299 for 36 months (for a total of $10,764). If you return the car at the end of the lease period, you’ll pay a lease termination fee of $500. You can earn 3% on your savings—what should you do?

36 Example: Should You Lease or Buy?  If you lease, you’ll make lower monthly payments and a much lower up-front cost Buy: Terminal Value of car: +$14,000 Total payments: –$17,784 Interest Lost: $ × 3% × 3 years Lease termination fee: $0 Total Cost: –4,144 Lease: Terminal Value of car: $0 Total payments: –$10,764 Interest Lost: –$ × 5% × 3 years Lease termination fee: –$500 Total Cost: –11,332

37 Tips for Leasing  Negotiate the price as if you were buying the car (don’t tell the salesperson you want to lease until after the price has been negotiated)  Ask what the rate is used to compute the lease payment—akin to the APR on a loan  Ask about the residual value of the car  Ask about wear-and-tear charges at the end of the lease (read this very carefully)  Decide how many miles per year you intend to drive the car—many companies charge a mileage rate if you exceed the mileage limit  Make sure the manufacturer’s warranty covers the entire lease term (both years and mileage)