Chapter 8: Automobiles and Other

Major Purchases

Objectives

• Understand several guidelines to save money on major purchases.

• Employ the three steps in wise buying that occur prior to interacting with sellers.

• Comparison shop when buying or leasing vehicles and other major purchases.

Objectives

• Negotiate effectively and make intelligent decisions when undertaking major expenditures.

• Evaluate your purchase decisions as a guide for future behavior.

Guidelines for Wise Buying

• Control buying on impulse

• Pay cash

• Buy at the right time

• Don’t pay extra for a “name”

• Recognize the high price of convenience shopping

• Use life-cycle planning for major purchases

• Calculate unit pricing or price per hours worked.

Steps Before Interacting with Seller

• Prioritize wants

• Do pre-shopping research

• Price

• Trade-in

• Cost of financing

• Fit expenditure into budget

Purchasing a Car: A Research-Based Approach - Phase 1: Preshopping

Activities

Problem identification. Information gathering.

• Personal contacts.• Media information-television, websites • Independent testing organizations- Consumer

Reports• Government agencies. • Online Sources – www.edmunds.com,

www.caranddriver.com, www.autoweb.com

Phase 2: Evaluation of Alternatives

Comparison shopping.Selecting vehicle options-convenience, appeal, etc.Comparing used vehicles- www.carmax.com,

www.carfax.com Leasing an automobile 1) lower payments, small initial cash outlay 2) no ownership in vehicle 3) maximum # of miles/year; charged for extra miles. 4) know the capitalized cost of the lease, the money factor, the monthly payment, number of payments, and the residual value.

8-8

BUYING VS LEASING AN AUTOMOBILE

Purchase Cost Example Your Figures Leasing Costs Example Your Figures

Total vehicle cost, including Security deposit ($300)

sales tax ($20,000)

Down payment (or full amount

if paying cash) $ 2,000.00

Monthly loan payment: $385 x 48 months Monthly lease payments:

(this item is zero is vehicle is not financed). 18,480.00 $385 x 36 months $ 13,860.00

Opportunity cost of down payment Opportunity cost of

(or total cost of vehicle if purchased with cash): security deposit: $300

$2,000 x 4 years of financing/ownership x 3% 240 security deposit x 3 yrs x 3% 27

Less: Estimated value of vehicle at end of loan End of lease charges (if

term/ownership period (6,000.00) applicable). 800

Total cost to buy $ 14,720.00 $ 14,687.00

Phase 3: Determining Purchase Price

Negotiation • Know necessary information about the product.• Deal with a person of authority to give you a lower

price or additional features.• Used-cars: Check newspaper ads, Kelly Blue Book

(www.kbb.com), www.edmunds.com • New cars: Set-price dealers, car-buying services

Compare financing alternatives.• Variety of lenders-some lenders may pre-approve

you.• Avoid being upside-down in your car.• Look for rebates or low-interest financing.• Consider the APR, total finance charge. Check out

www.bankrate.com 8-9

Phase 4: Postpurchase Activities

Lemon Laws. Maintenance and ownership costs Use the item correctly to have improved

performance and fewer repairs. Investigate, evaluate and negotiate a

variety of servicing options. Operation costs; fixed and variable

expenses. Automobile servicing sources; dealers,

service stations, garages, Wal-Mart, etc.8-10

Utah Lemon LawConsumers who buy or lease a new automobile or motor home with significant defects that can't be repaired,

or in other words is simply a "lemon," can obtain relief under the Utah New Motor Vehicle Warranties Act or "Lemon Law."

The Utah Lemon Law applies to new cars under warranty and was extended in 1990 to also cover new leased vehicles and motor homes. The Lemon Law does NOT apply to used vehicles.

For your vehicle to qualify as a "lemon" under the Utah Lemon Law:

The vehicle must have been purchased in the state of Utah;

The vehicle must be new and under warranty;

The vehicle must weigh less than 12,000 pounds;

The defect must "substantially impair the use, market value or safety of the vehicle";

The vehicle must have been to the manufacturer to have the same defect resolved at least four times OR out of service to the consumer a total of 30 days DURING the first year or the warranty period, whichever is less (if your problems occur AFTER this time period, you do NOT qualify for the Utah Lemon Law);

The defect cannot be the result of abuse, neglect or unauthorized modifications of the vehicle; AND

The consumer must go through any informal dispute settlement or arbitration procedure the manufacturer may have established. If your vehicle meets ALL of the criteria, your next step is to file a complaint with the Division of Consumer Protection. Include with your complaint COPIES of any relevant documents, including service records, and arbitration or dispute settlement records.

After your vehicle is determined to be a "lemon", you may qualify for either a replacement or a cash refund. The manufacturer may charge you a "reasonable" amount for use of the vehicle as prescribed by the Utah Lemon Law, usually 10 to 23 cents per mile. You can have the Division try to obtain restitution for you or you can take private action with your own attorney.

Comparison Shopping

•Warranties

• Implied

• Express

•Service contracts

•Leasing vs. buying

•Balloon financing

• Successful negotiations require information

• Make the decision

• Evaluate the decision

Negotiate and Decide On Best Deal

Financial Aspects of Leasing

Capitalized cost - the price of the vehicle. Average buyer pays 92% of list, average person who leases pays 96% of list.

Money factor - interest rate.

Monthly payment amount and number of payments.

Residual value - expected value of the vehicle at the end of the lease. You may decide to return, keep, or sell the vehicle. If the residual value is less than market value, return it.

8-20

Decision Making Grid

Price 30% 9 2.7 7 2.1 5 1.5

Durability 25% 6 1.5 8 2.0 10 2.5

Features 20% 6 1.2 8 1.6 10 2.0

Warranty 15% 6 0.9 10 1.5 8 1.2

Styling 10% 10 1.0 6 0.6 8 0.8

TOTAL 100% 7.3 7.8 8.0

Criteria

Decision

Weight (W)

Appliance A

Score (S)* W x S

Appliance B

Score (S) W x S

Appliance C

Score (S) W x S

*Using a 10-point scale.

Buying services • www.comsumerreports.org

Internet sites

• www.buyingadvice.com• www.carmax.com• www.carsbelowinvoice.com• www.edmunds.com• www.autosite.com• http://auto.consumerguide.com

Help When Buyinga New Vehicle

8 - 14

Rental Car Basics

• Type

• Price and gas payment

• Additional fees

• Reservations

• Mileage restrictions

• Insurance and inspection

Get Things Fixed

• Get estimate in advance

• Ask how long repairs will take

• Get claim check

• Ask to be given all replaced parts

• Be available when at-home repairs are made

• Get written receipt

Choose Between LowInterest and Rebate

• Compare actual costs

• Consider opportunity cost of rebate

• Add opportunity cost of foregone rebate to finance charge of dealer financing

Buy a Used Vehicle

• Decide on features and options

• Decide how much to spend

• Select makes/models in price range

• Start search

• Check selection carefully

• Negotiate and decide

Get the Most for YourCar-Buying Dollar

• Buy used vehicles

• Buy used vehicles from private owners

• Visit dealerships at least three times

• Negotiate price first

• Consider leasing

• Use up your vehicles

Resolving Company Complaints

1. Return to Place of Purchase2. Contact Company Headquarters3. Obtain Consumer Agency Assistance

• Mediation• Arbitration

4. Take Legal Action• Small Claims Court• Class-Action Suits