Planning Your Financial Future, 4eby: Boone, Kurtz & Hearth

Chapter 7

Transportation and Household Purchase

Decisions

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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

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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)?

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Figure 7.1: Steps in the Consumer Decision-Making Process

Household goals

Recognition ofproblem oropportunity

Purchasedecision

Purchase act

Evaluation ofalternatives

Postpurchaseevaluation

Personal influences•Needs•Attitudes•Personality•Previous experience

Environmental influences•Family members•Friends and acquaintances•Advertisements•Sales representatives

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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

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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 necessityWant – 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

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Table 7.1: Needs Versus Wants Worksheet

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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

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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

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Sources of Consumer Assistance

Consumer Action Handbook http://consumeraction.gov/viewpdf.shtml

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

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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.

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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

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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

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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

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Do You Need a Car?

Average new car costs $20,000Average 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

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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

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Figure 7.5: Breakdown of the Estimated Five-Year Ownership Cost of the Honda Accord

Source: Based on data from IntelliChoice, http://www.intellichoice.com, accessed July 8, 2004.

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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

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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

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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

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Web Links

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

http://www.intellichoice.comhttp://www.carfax.comhttp://www.edmunds.com

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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

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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

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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

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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

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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 signShop around for car financing—don’t let the

salesperson talk you into a lease Buying is usually the better alternative

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Alternatives to Negotiation

Many consumers hate the negotiation process Alternatives

Use the Internet (http://www.autobytel.com/) 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

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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

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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)

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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

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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

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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

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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

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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?

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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: +$14,000Total payments: –$17,784Interest Lost: $360

4000 × 3% × 3 yearsLease termination fee: $0Total Cost: –4,144

Lease:Terminal Value of car: $0Total payments: –$10,764Interest Lost: –$68

750 × 5% × 3 yearsLease termination fee: –$500Total Cost: –11,332

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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)