Chapter Eight Automobiles and Other Major Purchases

Chapter Eight

Automobiles and Other Major Purchases

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Learning Objectives

1. Describe guidelines for saving money on major purchases.

2. Explain the three steps in the planned buying process prior to interacting with sellers.

3. Describe key aspects of comparison shopping.

4. Negotiate effectively and make informed decisions when buying cars and other expensive products.

5. Evaluate purchase decisions and, if necessary, effectively seek redress.


Figure 8.1: The Key Steps in Planned Buying


Guidelines for Planned Buying

• Control Buying on Impulse

– Impulse Buying – buying without fully considering priorities and alternatives

• Pay Cash

• Buy at the Right Time

• Don’t Pay Extra for a “Name”

• Recognize the High Price of Convenience


Prioritize Your Wants

• Need – Something thought to be a necessity.

• Want – Unnecessary but desired.

What are your needs and wants in car features?


Figure 8.2: Priority Worksheet


Conduct the Necessary Pre-shopping Research

Pre-shopping Research – Gathering information about products or services before actually beginning to shop for them.


Researching Price

• Manufacturer’s Suggested Retail Price (MSRP) – Initial asking price.

– A.K.A., “Sticker Price” – appears on a window sticker in the vehicle.

– Dealer Sticker Price – includes additional charges tacked on by the dealer.

• Sticker prices are a STARTING POINT for negotiations


Researching Trade-In Values

• High-Balling – a dealer offers a trade-in allowance that is much higher than the vehicle is worth.

– Counterbalanced by charging more for new car

• “Upside Down” – to owe more on a vehicle during the first few years than it is worth.

– How can a buyer avoid being “upside down?”


Researching the Cost of Financing

• Loan Pre-Approval – Will let you know how much you can borrow, at what interest rate, and for how long before you start shopping

• Usually, buyer must choose between low-rate financing and a rebate

• Compare various loan sources:

– Dealer financing (e.g., GMAC, Ford Motor Credit)

– Commercial banks or S&Ls

– Credit Union


Researching Rebates

• Rebate – Nothing more than a refund of part of the purchase price.

– Factory-Direct Rebates – Come directly from the manufacturer to the buyer rather than to the dealer as part of a dealer incentive package.

• Buyer should use rebate money for downpayment on car- NOT spending money!

– Benefits of doing this?


Fit the Expenditure into Your Budget

• Ask the question “CAN I AFFORD IT?”

• One issue to ponder is the cost per use:

– Could you buy a less expensive model?

– Could you get along with fewer options?

– Could you rent or borrow an item, when needed?

• Budgeting Issues:

– What other expenses could be reduced?

– Could you earn additional income?

– Additional costs resulting from the purchase?


Comparison Shopping

• Comparison Shopping – process of comparing products or services to find the best buy.

• Best Buy – a product or service that, in the buyer’s opinion, represents acceptable quality at a fair or low price for that level of quality.

NOT just price: What else?


Compare Prices

Use the “Rule of Three”


Compare Financing Options

• www.bankrate.com

• “Same as cash” (90 days, 1 year) offers


Consider Leasing Instead of Buying

• Renting a product while the ownership title remains with the lease grantor.– Cars, apartments, furniture, appliances, electronics

• About 20% of new cars are leased

• Possible to lease used cars also


Five Important Terms in Leasing

1. Gross Capitalized Cost (or Gross Cap Cost).

2. Capitalized Cost Reductions (or Cap Cost Reductions).

3. Adjusted Capitalized Cost (or Adjusted Cap Cost).

4. Residual Value.

5. Money Factor (or Lease Rate or Lease Factor).


Types of Leases

• Closed-End Lease (or Walkaway Lease) – the holder pays no charge if the end-of-lease market value of the vehicle is lower than the originally projected residual value.

• Open-End Lease – the holder pays any difference between the projected residual value of the vehicle and its actual market value at the end of the lease period.


Loan Fees and Charges

• Acquisition Fee – either paid in cash or included in the gross capitalization cost.

• Disposition Fee – assessed when lessee turns in the vehicle at the end of the lease and the lessor (e.g., car dealer) must prepare it for resale.

• Early Termination Charge – may be levied if the holder decides to end the lease prematurely.


Loan Fees and Charges (Continued)• Early Termination Payoff – total amount the

holder needs to repay if ending the lease agreement early; it includes both the early termination charge and the unpaid lease balance.

• Balloon Automobile Loan – the last monthly payment equals the projected residual value of the vehicle at the end of the loan period;

– amount borrowed represents the difference between the selling price and the vehicle’s expected value at the end of the loan period.

– Smaller earlier payments; big final payment


Compare Warranties

Warranties – Assurances by sellers that goods are as promised and that certain steps will be taken to rectify problems.


Compare Warranties (Continued)

Full Warranty – Three stringent requirements:– A product must be fixed at no cost to the buyer within a

reasonable time after the owner has complained.– The owner will not have to undertake an unreasonable

task to return the product for repair.– A defective product will be replaced with a new one or the

buyer’s money will be returned if the product cannot be fixed after a reasonable number of attempts.

Limited Warranty – Includes less than a full warranty.


Service Contracts Are Overpriced

Service Contract – Agreement between seller and buyer of a product to provide repair services to covered components of the product for some specified time period.

– “Extended warranty” or “buyer protection plan”

– Similar to “term” life insurance

– Usually unwise (80% are never used)

Consumer Reports recommends for laptops and exercise equipment


Successful Negotiators Are Armed with Information

• Negotiating (or Haggling) – Process of discussing terms of an agreement with a seller.

• New-Vehicle Buying Service – No-fee organization that arranges discount purchases for buyers of new cars who are referred to nearby participating automobile dealers who have agreed to charge specific discount prices.

• Professional Shoppers – in exchange for a fee based on the sticker price, will find the best available price from a nearby dealer.


Successful Negotiators Are Armed with Information (Continued)

• Invoice Price (or Seller’s Cost) – Reflects the price the dealer paid for the vehicle.

• Dealer Holdback (or Dealer Rebate) – Percentage of the invoice that dealer can hold back from the manufacturer, thereby providing additional profit on the vehicle.

• Buyer’s Order – Names a specific vehicle and all charges– Sign ONLY after salesperson and manager– Beware of “lowballing” technique


Table 8.3: Complaint Procedure (Levels and Channels of Complaining)

Redress- “To right a wrong” (regarding product defect)


Evaluate Your Decision

• Small Claims Court – Court where civil matters are often resolved without the assistance of attorneys.

• Alternative Dispute Resolution Programs – industry- or government-sponsored programs that provide an avenue to resolve disputes outside the formal court system.


Evaluate Your Decision (Continued)

• Mediation – Procedure in which a neutral third party works with the parties involved in the dispute to arrive at a mutually agreeable solution.

• Arbitration – Neutral third party hears (or reads) the claims made and the positions taken by the parties to the dispute and issues a ruling that is binding on one or both parties.

• Lemon Laws – Provide guidelines for arbitrators to use to order a dealer’s buyback of a “lemon.”

– For cars that need to be repaired frequently for same problem.

– See www.carlemon.com for state law details.


Golden Rules of Automobiles and Other Major Purchases

1. Think through all major purchases by using the planned buying process.

1. Prioritize, Pre-shop, Fit purchase to budget, Comparison shop, Negotiate, Make decision, Evaluate decision

2. When considering a new or used vehicle, check that model’s repair ratings history in the April issue of Consumer Reports magazine.

3. Purchase late-model, high-quality, used vehicles and check their ownership history at www.carfax.com and recall history at www.dot.gov.


Golden Rules of Automobiles and Other Major Purchases (Continued)

4. If you want a new vehicle, purchase it rather than use a lease, put at least 20 percent down, and do not finance the purchase for more than 4 years.

5. Obtain price information from at least three sources and aggressively negotiate prices and financing terms for major purchases.

6. Never tell a seller what payment you can afford.

7. Promptly seek redress when dissatisfied with purchases or services.

Documents

Chapter Eight Automobiles and Other Major Purchases