Chapter 4 : Consumer Purchasing

1. Chapter 4: Consumer Purchasing Section 4.1 Consumer Purchasing • Today’s Agenda: • What influences your buying decisions? • Examine a research-based approach to buying • Strategies for making wise buying decisions • Goal: • Learning how to use various techniques to get the best value for your money!

2. Factors that Influence Buying Decisions Why do we buy what we buy? • Economic Factors • Social Factors • Personal Factors How might each of these factors affect our purchases? Figure 4.1

3. Convenience • Cash vs. Credit • Price vs. Quality • Online Purchasing • Forces us to think about priorities, consequences. Unless money is unlimited, Buying decisions involve trade-offs! How do You shop?

4. A Research-Based Approach • Phase 1: Before You Shop, Ask… • What do I really need? • What information will help me? • Do I know enough to make an informed decision? • What does pre-shopping research involve?

5. Identify Your Needs • WANTS vs. NEEDS • Have an open mind; think of ALL your options • Gather Information • Brands? Costs? Options/Features? Consequences • Where can you find reliable information? • Do you spend enough time? Too much time? • Know the Marketplace • Knowledge = POWER

6. Phase 2: Weighing the Alternatives • There are usually lots of options! Consider all of them! • Compare Features (what is important to you?) • Design? Quality? Performance? LOOK? • Compare Prices • Does Price = Quality? • Compare Vendors • Go to different stores, look online • When is this especially useful?

7. Phase 3: Making the Purchase • Negotiate the Price (if possible!) • Decide on Credit or Cash • Costs? • Benefits? • Know the Real Price • Does the listed price include everything? • Phase 4: After the Purchase • Rethink your purchase • Did you make the right choice? Why evaluate?

8. Smart Buying Strategies • Time Your Purchases • Law of supply and demand • Store Selection • Benefits vs. Limitations • Compare Brands • Generic vs. National Brands? Can you tell the difference?

9. Pg. 100 Impulse Buying can ruin a budget! Try a 2-day cool-down period • Examine Labels • Cool Advertising • Compare Prices • Unit Pricing • Is bigger always better? $9 $45

10. Unit = Weight Unit = Volume

11. Supplement to Chapter 4 Purchasing a Vehicle • Today’s Agenda: • Learn what it means to “LEASE” a vehicle • Goals: • Understand how a lease works & how it compares to buying a vehicle • Recognize the factors that affect the cost of a lease • Identify the advantages / disadvantages of leasing

12. Review Our Car “Purchase” • Terminology: • The 3 prices you found • Consumer reviews, fuel economy, depreciation MSRP TMV Invoice Price

13. What happens to the value of my car over time? MSRP = $18,350 The value of my car at any given point in time is it’s “RESIDUAL VALUE”

14. Let’s BUY it!2011 Mazda3 i Sport Advertised Price: $16,338 Add tax, license, registration: = $18,000 Borrow $18,000 over 3 years @ 7% Guess I need a loan! $555.80

15. $233

16. What does it mean to “LEASE” this car for 3 years? I will “rent” this car… it will depreciate as I drive it. Value after 3 years? When my lease is up, I simply return vehicle to dealership.

17. In a LEASE, you only pay for what you use: $18,350 DEPRECIATION $7,340 Car is worth 60% of its original MSRP at this point: 60% of $18,350 = $11,010 RESIDUAL $11,010 You pay for the DEPRECIATION!

18. You pay depreciation + sales tax (on this amount) + interest(for borrowing)~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ $7,340 $600 $450 What is my monthly cost to lease this vehicle for 3 years? $8390 $233 36 payments

19. Let’s look at the “BUY” option again… After 3 years I have paid $18,000 and the car is MINE. After 7 years, Residual value is $3000 If I sell for $3000 after 7 years, what was my overall cost? $18,000 paid - $3,000 received = $15,000 (or $178 per month)

20. LEASING…The good and the bad: Advantages: Disadvantages: Restrictions on mileage No equity (ownership) Charges for excess “wear” Always a payment! • Lower monthly payment • Save on sales tax • Always under warranty • Afford nicer car

21. CONCLUSIONS… • Leasing can be confusing! • Cost to lease depends on a car’s depreciation • Leasing is wise in certain situations… • Decide if it is right for YOU! Long-Term: Buying is Cheaper Middle (4-5 yrs): Even Short-Term: Leasing Wins

22. Shopping for a Vehicle • Information = Power • Smart shoppers do their homework! • Why gather information before interacting with sellers???? • Remember: sellers are highly skilled; not objective • The key to successful negotiating: enough knowledge and accurate information

23. Where to Begin… • Pre-Shopping Thoughts: • Determine your affordability (look at budget) • Think about your choices: buy used; buy new; lease; bus! (what works with your budget?) • StartResearch • Investigate makes, models (talk to friends, read reviews) • Narrow down choices based on what is important to YOU: • => Safety, features, fuel efficiency, warranty?

24. Examine your financing options • Remember: If you are taking out a car loan, what 2 factors will affect your monthly payments? • Interest rate: • Check with local bank/credit union • Know your credit score! • Is manufacturer or dealer offering any special financing deals? • Term: how many months to pay off loan • Trend: longer-term financing--what does this do?

25. Other things to research: • Available rebates / incentives? • Reviews? • Comparable vehicles / feature comparisons? • Depreciation? • Warranty? • Do you have a vehicle to trade-in? • (Find out its value BEFORE talking to salesperson) • Tips on Negotiating your trade-in: • Treat the purchase and trade-in as separate transactions • Come to agreement on purchase price of new car • Then, negotiate a price for your trade-in • Sell the vehicle yourself if they come in too low

26. Get Organized? 3 Basic Options to Consider: • Sheet One: New Car Buy • Negotiate one thing at a time. • With many other variables (new car price, trade-in, rebates, options, interest rate) the dealer can APPEAR to be cooperative on one aspect and make up the difference elsewhere! • MSRP vs. Invoice Price vs. TMV • What do each of these mean? Know exactly how the monthly figure was calculated!

27. Sheet Two: Used Car Buy • Remember: Late model used car with low mileage = practically “new” ! • Research pricing: www.edmunds.com • Trade-In vs. Dealer Retail vs. Private Party • What do each of these mean? • Most research, including inventory searches, can be done online / in newspapers • Sheet Three: Leasing a Vehicle • What is an automobile lease? Read handout

28. Leasing Terminology • Capitalized Cost [Cap Cost] • Negotiated price of vehicle • Cap Cost Reduction • Down payment, trade-in, or rebate that will reduce the amount being financed • Adjusted Cap Cost • Cap cost – cap cost reductions: the actual amount being financed • Residual Value • The projected value of the vehicle at the end of the lease • Money Factor • Similar to APR to finance vehicle (multiply by 2400 to compare) • Price of Vehicle – Residual Value = Depreciation DEPRECIATED VALUE = $7,000 RESIDUAL VALUE = $13,000

29. Open-end lease vs. Closed-end leases • Excess mileage charges • Acquisition fee • Disposition fee • Early termination fee In general, be cautious about leasing: It is complicated. Remember: Knowledge = Power • Leasing Advantages: • More car for the money because lower monthly payments • Best when depreciation is low (residual value is high) • Cheaper in the short-run • Leasing Disadvantages: • At the end of lease you don’t own the car • Usually more expensive in the long-run • Mileage allowance