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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
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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)