Buying a Motor Vehicle

1. Buying a Motor Vehicle • Many people buy new cars on impulse. • The best way to purchase a new automobile is to avoid poorly thought out decisions. • Before shopping, ask, “Do I actually need a new car?” • Consider other transportation alternatives before purchasing a car. 7-2

2. Costs of Owning An Auto • Costs of owning an auto are divided into two categories: • Fixed expenses – constant expenses which remain whether you use the car or not. • Variable expenses – these increase with the usage of the car. 7-3

3. Fixed Expenses of Automobile ownership Finance charges - When you borrow money to purchase an auto, you are paying interest to a financial institution. Depreciation – This is the decline in the value of an asset over time. Autos depreciate due to wear and tear. Incremental auto insurance premiums – A new car purchase will increase the cost of an insurance policy, in addition, depending on the type of car you purchase, the policy will increase. Other fixed costs – include registration, license, and taxes. 7-4

4. Evaluating Alternatives The following chart is a list of some things to consider when buying an auto: 7-5

5. Important Considerations Safety – There are 40,000 auto fatalities per year, the safety features of a car are important. Reliability – Be sure to check the car’s reliability rating in Consumer Reports. Warranties – Be sure to read and obtain all car warranties in writing before a purchase. 7-6

6. Determining Purchase Price • You can negotiate effectively if you known the ways a dealer can make a profit: • Difference between the dealer invoice price and what it sells for • Profit on dealer installed options • Extended warranties • Finance charges & application fees 7-7

7. Financing Alternatives The decision to lease or buy depends on your personal needs: Lease – is a rental agreement between the car owner, the lessor and you, the lessee, in which you agree to pay a price for the car during the contract period. The cost of a lease is determined by the difference between the initial value of the car and the resale value at the end of the lease. 7-8

8. Lease terminology • Gross capitalized cost – the value of the vehicle. • Up-front fees – fees charged for credit checks, or acquisition fees. • Capitalized cost reduction – a down payment, or rebate will reduce the gross capitalized cost. • Residual value – expected depreciation value of the vehicle at the end of the lease term. 7-9

9. Factors affecting mortgages • Mortgages are affected by interest rates, term, points, economic factors, your default risk and the property. • There are many circumstances where someone may want to consider obtaining a new mortgage, and pay off the old one, this is called refinancing. It is done to save money and lower monthly payments. • A closing is the legal process whereby you take title to the property. 7-19

10. How Insurance Works • Insurance companies are financial institutions that provide a valuable risk-spreading service by pooling premium dollars. • The concept of risk pooling is based on the law of large numbers. • Law says that for large pools of identical risks, the risk that actual losses per person will be greater than predicted decreases as the size of the pool increases. 8-2

11. Insurance premiums • The amount an insurer charges each policyholder is known as the premium. • Policy holders are classified according to risk classification. • Three types of risks which are difficult to insure because the nature of the risk makes it difficult to estimated expected losses: • Correlated risks – risks that affect large numbers of policyholders all at once in the same area. • Nonrandom risks – risks that are within the control of the policyholder. • Unpredictable risks – risks that have potentially unlimited dollar losses and make it impossible to estimate the pool’s losses. 8-3

12. Insurance Terminology • An insurance policy is a contract which explains all the rights and responsibilities of the parties to the contract. • An exclusion is a contract clause that specifically identifies losses that are not covered under the policy. • The principle of indemnity says that you should never be able to recover more than what you have lost. • Most insurance policies contain a deductible which is an amount that you must pay out of pocket before the insurance company will pay anything. 8-4

13. Automobile Insurance • All states have laws requiring car owners to carry a minimal amount of auto liability insurance. All states require car owners to register their autos. • Like homeowner’s policies, auto insurance includes coverage for both property and liability risks. • Each state has a standard personal automobile policy, (PAP) for individual coverage and a family automobile policy (FAP). 8-10

14. Personal Automobile Policy • Both PAP and FAP contain two components: • Bodily injury – It protects you from legal liability, medical costs and covers injuries you incur in an accident caused by an uninsured motorist. • Property Damage – includes collision coverage, which insures against loss or damage to your vehicle, and comprehensive physical damage coverage, which covers loss or damage to your vehicle from any other peril. 8-11

15. No-Fault Auto Insurance • No-fault auto insurance laws requires each driver to look to his insurer to pay his economic losses, regardless of who was at fault in the accident. The intent of this type of coverage called, personal injury protection (PIP) is twofold: • Prompt and adequate compensation • Reduced premiums for state residents for the reduction in litigation costs. 8-12

16. Auto Insurance Premiums • Premiums for auto insurance are meant to cover expected losses and generate a profit. • The following are factors that affect your premium: • How much you drive • How well you drive • Your risk characteristics • Where you drive • What type of vehicle you drive • Who your insurer is 8-13

17. Auto Accidents If you have an accident you should: • Stop your vehicle and wait for the police • Call 911 to report the accident • Exchange names and insurance information • Obtain the names of witnesses • Get a copy of the police report 8-14

18. Buying Insurance and Filing Claims • You can buy insurance directly from the company or through an independent agent. • Be sure to get price quotes. • For example, www.geico.com provides online quotes. • If you have suffered a loss notify the company immediately. • Document your losses. • Do not sign anything until you understand it and possibly have consulted with an attorney. 8-15

19. Automobile Insurance • All states have laws requiring car owners to carry a minimal amount of auto liability insurance. All states require car owners to register their autos. • Like homeowner’s policies, auto insurance includes coverage for both property and liability risks. • Each state has a standard personal automobile policy, (PAP) for individual coverage and a family automobile policy (FAP). 8-10

20. Personal Automobile Policy • Both PAP and FAP contain two components: • Bodily injury – It protects you from legal liability, medical costs and covers injuries you incur in an accident caused by an uninsured motorist. • Property Damage – includes collision coverage, which insures against loss or damage to your vehicle, and comprehensive physical damage coverage, which covers loss or damage to your vehicle from any other peril. 8-11

21. No-Fault Auto Insurance • No-fault auto insurance laws requires each driver to look to his insurer to pay his economic losses, regardless of who was at fault in the accident. The intent of this type of coverage called, personal injury protection (PIP) is twofold: • Prompt and adequate compensation • Reduced premiums for state residents for the reduction in litigation costs. 8-12

22. Auto Insurance Premiums • Premiums for auto insurance are meant to cover expected losses and generate a profit. • The following are factors that affect your premium: • How much you drive • How well you drive • Your risk characteristics • Where you drive • What type of vehicle you drive • Who your insurer is 8-13

23. Auto Accidents If you have an accident you should: • Stop your vehicle and wait for the police • Call 911 to report the accident • Exchange names and insurance information • Obtain the names of witnesses • Get a copy of the police report 8-14

24. Buying Insurance and Filing Claims • You can buy insurance directly from the company or through an independent agent. • Be sure to get price quotes. • For example, www.geico.com provides online quotes. • If you have suffered a loss notify the company immediately. • Document your losses. • Do not sign anything until you understand it and possibly have consulted with an attorney. 8-15