Garman/Forgue

Personal FinanceNinth Edition

Chapter 8

Vehicle and

Other Major Purchases

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Learning Objectives

1. Explain the three steps in the planned buying process that occur prior to interacting with sellers.

2. Describe the five aspects of major purchases that require comparison shopping.

3. Negotiate effectively when making major purchases.

4. Evaluate your purchase decisions.

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Do Your Homework

• Planned Buying

– An everyday occurrence?

The Steps in Planned Buying

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• Need vs. Want

• We have a lot of WANTS! PRIORITIZE: Cost vs. Benefit

Priority Worksheet: pg 225

Impulse buying vs. comparison shopping

Do Your Homework!

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What do you know about the product?

• For large purchases, Information = Power

• Smart shoppers do their homework!

• Preshopping Research: Gathering information before interacting with sellers

– Information sources?

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• What is a fair price?

– Can you Negotiate?

– Manufacturer’s Suggested Retail Price (or MSRP) vs. Invoice Price

• Where can I find REAL price information?

– www.edmunds.com

– www.kbb.com

• Is a rebate available?

– Investigate online to find out

• What is my trade-in worth?

– Do your homework to find out before

– How are your negotiation skills?

• What term is best for me?– Trend: longer-term financing--what does this do?

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• Most importantly, HOW MUCH CAN I AFFORD?

• Recall from chapter 6!

• Debt payments-to-disposable income

• AKA: Debt-to-Income ratio = monthly net income monthly installment

debt (non-housing)

• YOU should set your own debt limit

Debt payments-to-disposable income:

Should NOT exceed 16%

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Fitting a new payment into a tight budget… IS IT WORTH IT?

A Car Buying Illustration, pg 227

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Use Comparison Shopping

• Interacting with sellers to find the best buy– “Best Buy” = acceptable quality at a fair price

• Does the “best buy” = lowest price?

• Time + Effort => Save $ => Satisfaction

• Compare prices/quality/reputation among various sellers (rule of three)

• Beware! Beware! Are you upside down? What is Negative Equity?

• Compare financing options - loan preapproval

• Compare rebate incentives, low APR

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What is leasing?

New form of leasing: “smart buys”

Increasingly popular with new-car shoppers… WHY?

Advantages:

More car for the money

Lower monthly payments

Disadvantages:

At the end of lease you don’t own the car

May be more expensive overall to lease

Mileage allowance

Leasing as an alternative to buying

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Leasing Terminology1. Gross Capitalized Cost

Negotiated price of vehicle (inc taxes/fees)

Cap Cost

2. Cap Cost Reduction Down payment, trade-in, or rebate that

will reduce the amount being financed

3. Adjusted Cap Cost Cap cost – cap cost reductions:

the actual amount being financed

4. Residual Value The projected value of the vehicle at the end of the lease

5. Money Factor Similar to APR to finance vehicle (multiply by 2400 to compare)

6. Cap Cost – Residual Value = Depreciated Value of vehicle

DEPRECIATED VALUE = $7,000

RESIDUALVALUE = $13,000

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7. Open-end lease vs. Closed-end leases

8. Excess mileage charges

9. Acquisition fee

10. Disposition fee

11. Early termination fee

• Be careful about GAP insurance

• Full vs. Limited Warranties, pg 233

• Extended warranties : almost 80% never used!!

In general, be cautious about leasing: It can be complicated.

Remember: Knowledge = Power

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Whether Buying or Leasing…Negotiate Effectively

• Remember: sellers are highly skilled; not objective

• The key to successful negotiating is to be armed with knowledge and accurate information

Where to Start?

• Rule: negotiate only PRICE of VEHICLE

– With many other variables (trade-in, rebates, options, interest rate,) the dealer can APPEAR to be cooperative on one aspect and make up the difference elsewhere!

• Dealer Holdback

• Negotiate interest rate

• Negotiate Trade-in: beware of high-balling

• Good Cop-Bad Cop!

• Finalize car deal and beware of low-balling

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• Second, negotiate your interest rate

– Negotiate lowest possible APR through the dealer

– Know your credit score!

– Borrow elsewhere if the rate is lower

• Third, negotiate your trade-in

– Know the value of your vehicle: preshopping research

– Obtain a firm commitment on a trade-in allowance

– Sell the vehicle yourself if the allowance is too low

– Beware of high-balling

• Fourth, shop around: rule of 3!

• Lastly, make your decision

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The Top 3 MistakesIn Big-Ticket Purchases

1. Believing that the seller is an unbiased source of information for price, financial terms, and trade-in value.

2. Telling a seller what you can afford to pay so the seller can avoid disclosing the lowest price or telling a seller your expectations for a monthly payment.

3. Failing to do research on your own before you go shopping and talk to salespeople.