Chapter 7

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

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 • You have control, made a conscious decision, were 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. Figure 7.2: 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 pre-approved credit card solicitations • Regularly reviewing credit record

11. Sources of Consumer Assistance • Consumer’s Resource Handbook • http://www.pueblo.gsa.gov/crh/respref.htm • 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 ½ 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’s Resource 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 2nd or 3rd largest expense a consumer will make

16. Do You Really Need a Car? • Average new car costs less than $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 Really 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

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. Do You Want a New or 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 • http://aff.carprices.com/default.htm • http://www.intellichoice.com • http://www.carfax.com • http://www.edmunds.com

23. NADA Used Car Guide • Published monthly by 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. Toolbox: 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. Toolbox: 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 (http://www.autobytel.com) • Some manufacturers (Saturn) have a strict, no-haggle pricing policy • Cost plus basis • Annual (or semi-annual) 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 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, 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 expiration of bumper-to-bumper • 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: $360 4000 x 3% x 3 years Lease termination fee: $0 Total Cost: -4,144 Lease: Terminal Value of car: $0 Total payments: -$10,764 Interest Lost: -$68 750 x 5% x 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)