Personal Finance: Another Perspective

1. Personal Finance: Another Perspective The Auto Decision: Understanding Buying versus Leasing

2. Objectives Understand how a car fits into your financial plan Understand key issues of car ownership C. Understand how to buy or lease a new vehicle and the lease versus buy decision D. Understand how to buy a used car

3. A. How does a Car Fit Into your Financial Plan? • Most important reasons • It’s a means of transportation • You have saved for it • It is within your budget • Less important reasons • It’s fun to drive • It’s fast • It makes a statement about your lifestyle (as if you care)

4. How can a Car Hurt your Goals? • You borrow the money • Instead of earning interest, you pay it • Its not in your budget • It takes the place of more important goals • Its more than you had planned • It relegates more important goals to a lesser position

5. Questions • Do you know how a car fits into your personal financial plans?

6. Understand Key Issues in Auto Decisions • There are a number of important topics to understand before we discuss buying or leasing new or used vehicles. These include: • 1. Choosing a vehicle • Goals and Budget • Safety Reports • Automobile Reports • Insurance • 2. Before You Go Looking • New/Used Vehicle Prices • Holdback • Warranties • Service Contracts • Lemon Laws • 3. After You Have Found It • Vehicle History • Checked by a Mechanic • Maintenance records

7. Choosing a Vehicle:Your Goals and Your Budget • Know your goals and your budget • Have you written down your goals? • Are you living on a budget? • If you are planning to finance the vehicle (not recommended), are there sufficient funds to cover the costs and still attain your other goals • Are you putting aside money each month to purchase another vehicle in the future

8. Choosing: Vehicle Ratings and Safety • Pick a vehicle that is safe for your family • Where do you find information on vehicle safety and ratings? • There are a number of good sites. A good place to start is the National Highway Traffic Safety Administration site at www.nhtsa.gov, safer cars at www.safercar.gov, and the Insurance Institute for Highway Safety at www.iihs.org • You get information on safety ratings, crash tests and other important information about specific vehicles

9. Choosing: Automobile Reports • Pick a vehicle with a strong safety and repair record • Where do you find safety and repair information? • You can find good information at Consumer Reports on new and used vehicles at www.consumerreports.org. • There is a lot of great information at this source on vehicles and ratings

10. Choosing: Insurance • Pick a vehicle that is inexpensive to insure and drive • Which vehicles are more expensive to insure? • The Insurance Services Office (ISO) rates each vehicle on its loss history, with a number between 3 and 27. • The higher the number, the more expensive the coverage • Sports cars, high performance cars, and even SUV’s are more expensive to insure • Which vehicles are more expensive to drive? • Check the miles per gallon in the city and highway

11. Before You Go Looking: New versus Used Decision • Your choice of new versus used vehicles will depend on three areas: goals, preferences, and available budget for transportation expenses • New Vehicles • Advantages • New vehicle and all that goes with it • Lower maintenance costs • Car may last longer (it is not used) • Disadvantages • Higher initial vehicle costs • Higher insurance costs • May limit other goals if spend too much

12. Before You Go: New versus Used Decision (continued) • Used Vehicles • Advantages • Lower initial vehicle costs • Lower insurance costs • May provide additional resources for other goals due to lower costs • Disadvantages • Higher maintenance costs • Will likely have to replace it sooner than new car

13. Before You Go:New Vehicle Prices • Know what the dealer paid for the vehicle • Where can you get reliable estimates for new vehicle prices? • There are a number of automobile websites where you can get great estimates of what the dealer paid from the manufacturer, i.e., www.edmunds.com, www.autosite.com, or www.kbb.com. • Put in the manufacturer, model, and options and you can get the invoice price • Negotiations should begin at the invoice price

14. Before you Go: Used Vehicle Prices • Know the price range for the used vehicle you are looking at (good to excellent condition) • Where do you find information on used car prices? • You can generally find the same information on used cars, just as you do new cars. Key sources include www.edmunds.com, www.autosite.com, www.kbb.com, www.nada.com or www.vehix.com. • Know which guides are used in your area, i.e. Nada versus Kelly Blue Book

16. Before you Go: Holdback • Know the dealer Holdback • What is a holdback? • The holdback is a rebate to the dealer to compensate the dealer for holding the vehicle on his lot. Information on holdback is found at many different sources, including: http://www.edmunds.com/advice/incentives/holdback/ • Why is this important? • It is important for you to realize that even when the dealer sells a vehicle at this cost, he is still making money

17. Before you Go:Warranties • Know the warranty and period • What are warranties? • Warranties are assurances that goods are as promised and that any problems will be resolved • What are full warranties? • Full warranties are contracts that require: • 1. Product will be fixed at no cost to the buyer within a specified time • 2. Owner will not have to undertake unreasonable tasks to return the product • 3. Defective product will be replaced or money returned if the product cannot be fixed

18. Before you Go:Service Contracts • Know available service contracts and providers • What are service contracts? • Agreements between the contract seller (dealer, manufacturer, etc.) to provide free (or with a deductible) repair services to covered components specified length of time or mileage after the original warranties are over. What should you be concerned about? • Contract terms: Items covered (power-train), length of coverage (i.e., 5 years), and mileage Contract seller: Who stands behind it. Generally service contracts from the manufacturer are better as you can get service nation-wide

19. Before you Go:Lemon Laws (Consumer Protection) • Know your rights as a consumer • What are lemon laws? • Laws established to protect the consumer in case the vehicle purchased is a “lemon” • How do you know if you have a lemon? • You are still having problems, and you have made: • 4 attempts to fix the problem, and • The car was out of service at least 30 days during the first 12 months or 12,000 miles • Take the car back and either get another car or your money back

20. After You Have Found It:Vehicle History • Get a vehicle history report • What is a vehicle history report? • It is a record of each and every time the vehicle was registered with a different owner in the records of the state • How can you get a copy of a vehicle history? • You can go to www.carfax.com. By putting in the Vehicle Identification Number (VIN), you can get a report as to the ownership and location of a vehicles history.

21. After You Have Found It:Checked by a good Mechanic • Get the vehicle checked by a qualified mechanic • How do you get it checked? • Take it to a qualified mechanic, preferably from a dealer for a major checkup • While it may cost between $80-250, it will be worth it if they find problems

22. After You Have Found It:Service Records • Review the service records of the vehicle • How do you check service records? • Sellers should have a copy of all service performed on the vehicle • Consumers should keep a record of all service performed • Dealers, oil change places, etc., often have records of when service was performed • Vehicles which have good service records were likely better taken care of than those without, and as such, command a higher premium

23. Questions • Any questions on keys issues in buying or leasing new and used vehicles?

24. C. Understand how to Buy or Lease a Vehicle and the Lease/Buy Decision • General Guidelines (the process): 1. Know the terminology 2. Narrow your choices and pick your vehicle 3. Determine your total price and negotiate for it 4. Finance the purchase if you must (lease or buy) 5. Enjoy your purchase and keep it well maintained

25. 1. Know the Terminology • MSRP • Manufacturers hoped for price • Capitalized cost • Your agreed to or negotiated cost • Capitalized cost reduction • Any reductions in cap. cost, such as rebates, down payment, dealer incentives, trade-in, etc. • Net capitalized cost (also called adjusted capitalized cost) • Capitalized cost less capitalized cost reduction • Residual value • Expected value of the vehicle at term end • Lease term • The number of months the vehicle is leased

26. Leasing Terminology (continued) There are three parts to lease costs • 1. Usage (or depreciation) • Usage is the amount of the value of the vehicle that is used. It is calculated by taking the net capitalize cost less the vehicle’s residual value • 2. Monthly Interest costs (or finance costs) • (Net capitalized cost + residual) * money factor • It is the average amount borrowed times the monthly interest rate: (Net cap. cost + residual) / 2 times average interest rates: APR / 12 • 3. Taxes • Taxes are (usage + interest) * tax rate

27. Leasing Terminology (continued) • What is the Money Factor? • It is a way of expressing interest rates. It is the APR (in decimal form) divided by 24. • It is a way of calculating your monthly interest costs, which is the average amount borrowed * average interest rate • Average amount borrowed: (Net capitalized cost + residual) / 2 • Average interest rate: APR / 12 • Multiplied together: (Net cap. cost + residual) * APR / 24 (which is your money factor) gives your monthly interest charge

28. 2. Narrow Your Choices and Pick your Vehicle • Comparison shop: price, product features, and quality. • Be informed: check library and Web sources. • Look at the alternatives • Fit your car into your budget—don’t make your budget fit your car! • Calculate your payments if you must finance it.

29. Narrow and Pick (continued) • Do your comparison shopping (via the internet or other publications) • Compare price • Compare features • Compare quality • Determine what is available in your price range. • Test-drive the exact vehicle you are considering.

30. 3. Determine your Total Price and Negotiate for It(Capitalized Cost) • Before you begin negotiations • Determine how much you can spend • Identify the car(s) you are interested in • Do your homework and find the dealer’s cost plus any: • Rebates • Holdback from manufacturer • Total markup • MSRP & dealer invoice • www.autosite.com, www.edmund.com

31. Negotiating (continued) • Start negotiations at dealers invoice • If they won’t share it, go someplace that will! • Both the Chevrolet and Ford dealers in the area were willing to share their invoices • Often invoice plus $100-500 will work • Dealer inventory often impacts difference between invoice and MSRP (demand & supply) • Date often affects dealers willingness to deal • End of month and end of year are particularly good times to buy • Tell them that you will not force them to take your money!

32. 4. Finance the Purchase (if you must)

33. 5. Maintain Your Purchase • Read the owner’s manual and perform regular maintenance • Particularly do oil changes every 3,000 miles • Don’t ignore warning signals. • You do at your peril! • Choose a good garage; check training and experience

34. Questions • Any questions on general guidelines on buying a new vehicle?

35. Lease versus Buy: Buying • The lease versus buy decision is determined on three areas: goals, preferences, and available budget for transportation expenses. • Advantages • You are protected in case of job loss or change • You can drive unlimited miles and modify your car • No monthly payments • Vehicle can be used for any purpose • Disadvantages • Higher up front costs • Expensive if you get a new car every few years

36. Lease versus Buy: Leasing • Advantages • Payments are usually lower, as you only pay for portion of car you use • Good if you want new car every 2 to 3 years • You pay sales tax only on monthly payment • Disadvantages • No flexibility in moving, high fees and fixed mileage • At the end of the contract you don’t own the car • Dealers sell you a new car every few years and make more money off of you • Profits can be hidden due to complexities of leasing

37. The Leasing Process: 1. Negotiate the Price (first)!

38. Negotiate the Price First (continued) • Never walk into a dealership and announce you want to lease a car, and don’t talk payments either. • Any competent dealer can find a way to make a car fit your budget while maximizing his profits • Know beforehand which car you want and know how much you can afford

39. 2. Select the Lease Term (the Schedule)

40. 3. Calculate Residual Value • Auto Residual Guides • Kelly Blue Book (kbb.com) • Edmund (edmund.com) • Important parameters • Year, make & model of auto • Term of lease • Apply residual ratio to MSRP to calculate residual value

41. Residual Value Example $30,000 Price, 7.44% rate, .56 Residual ratio, $30,000 MSRP X .56 Residual ratio (3 year lease) $16,800 Residual value Then $30,000 Agreed upon price (may be the MSRP) <16,800> Residual value $13,200 Usage /Depreciation Fee (that portion you of the vehicle you are using) divided by the months in the lease (36) $366.67 for the monthly depreciation payment

42. 4. Determine your Costs • Costs of Leasing • Up Front and End of Lease fees • Acquisition , Registration , License, and Document Fees (paid upfront), termination • Monthly • Usage/Depreciation (13,200 / 36 months)=$366.67 • Finance (($30,000+16,800) * MF or (.0744 / 24) = $144.30 per month • Sales Tax (366.67+ 144.30)=510.97 *.0625 = $31.94 • Total Monthly Cost of Lease = 366.67 + 144.30 + 31.94 = $542.91

43. 5. Maintain Your Purchase • Read the owner’s manual and perform regular maintenance • Particularly do oil changes every 3,000 miles • Don’t ignore warning signals. • You do at your peril! • Choose a good garage; check training and experience. • These are the same as for buying except: • If your lease extends beyond the manufactures warranty (generally 36 months), get an extended warranty to protect you!

44. Questions • Any questions on the lease versus buy decision?

45. D. Buying A Used Automobile • Key questions to ask on buying a used car: • 1. Can I afford this car? • Will it fit into my monthly budget? Is it a need? • 2. Does it meet my current driving needs? • What type of driving you do? Shop for a car that meets your driving patterns • 3. Will it meet my future needs? • Consider how you will feel about this car a year or two from now. Will your family be growing? • 4. Does it meet my preferences? • Gas mileage, sedan/SUV/truck, 2-door/4-door, safety?

46. Getting the Best Deal • The cost of a vehicle is based on its reliability, performance and popularity • Of course you want a car that is reliable and performs well. But do you want the same used car everyone else wants? • If so, you will pay a premium for it. In some cases, the only difference is the nameplate • Check reliability at www.consumerreports.com • Check your needs versus wants!

47. If You Must Finance the Car • I do not recommend financing a vehicle! • This is not a preferred method—don’t borrow • But if you must: • Get your financing approved beforehand from a credit union or other financial institution • Do not use in-house financing unless you get special deals (0% financing) or unless it is very competitive • Make sure you read the fine print completely!

48. Getting Used Car Financing • If you must borrow, there are several different lenders available for funding a dealership used car loan • Banks and credit unions • This is generally the cheapest form of borrowing (after parents) • Banks will typically only finance a car that is less than five years old • Auto Dealerships. • Dealerships will consistently have the worst interest rates because they are selling you their services

49. Financing a Used Car (continued) • When looking for a lender, it is also important to consider the maximum length of the loan • The good news is that most banks have 60-month programs for late used models • However, the older the vehicle, the less likely it will sustain for a full 60 months • In general, the older the vehicle, the shorter the loan length. An older vehicle is not good collateral for a loan.

50. Sources of Used Cars • The three most common places from which you can buy used cars are the following: • 1. Private parties • Generally the most reasonable prices, but no warranty • 2. New car dealerships • Some may be backed by warranties • 3. Used car lots • Run by rental car agencies. • Sometimes no haggle buying, competitive prices, and perhaps the factory warranty may still be in effect