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Chapter 7 Transportation and Household Purchase Decisions 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

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Chapter 7 l.jpg

Chapter 7

Transportation and Household Purchase Decisions

Introduction l.jpg

  • 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

How households make purchase decisions l.jpg
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)?

Figure 7 1 steps in the consumer decision making process l.jpg



  • Personal influences

  • Needs

  • Attitudes

  • Personality

  • Previous experience

Recognition of

problem or


Evaluation of


  • Environmental influences

  • Family members

  • Friends and acquaintances

  • Advertisements

  • Sales representatives



Purchase act



Figure 7.1: Steps in the Consumer Decision-Making Process

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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

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Benefits of A Step-by-Step Approach

  • Everyone impulse buys, but it’s better to not do this, because it is better to

    • Have control, make a conscious decision, be 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

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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

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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

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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 preapproved credit card solicitations

      • Regularly reviewing credit record

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Sources of Consumer Assistance

  • Consumer Action Handbook


  • 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 half of businesses belong to BBB

  • Consumers Union

    • Publishes Consumer Reports magazine

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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 Action Handbook

  • State and local government consumer protection services

    • Regulate public utilities, health-care delivery, insurance practices, etc.

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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

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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

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The Transportation Decision

  • About 11% of our money is spent on transportation

    • Including insurance, gasoline, and other driving costs, maintenance, etc.

  • It’s the second or third largest expense a consumer will make

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Do You Need a Car?

  • Average new car costs $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

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Do You Need a Car?

  • The cost of owning and operating an automobile

    • Financing the purchase

    • Maintaining the vehicle

    • Car insurance

    • Registration fees

    • Fuel

    • Depreciation

Figure 7 5 breakdown of the estimated five year ownership cost of the honda accord l.jpg

Source: Based on data from IntelliChoice,, accessed July 8, 2004.

Figure 7.5: Breakdown of the Estimated Five-Year Ownership Cost of the Honda Accord

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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

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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

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A New or a 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

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Web Links

  • LOTS of different web sites to help you determine a fair value for new and used cars




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NADA Used Car Guide

  • Published monthly by the 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

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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

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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

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Tips for 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

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Tips for 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

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Alternatives to Negotiation

  • Many consumers hate the negotiation process

  • Alternatives

    • Use the Internet (

    • Some manufacturers (Saturn) have a strict, no-haggle pricing policy

    • Cost-plus basis

      • Annual (or semiannual) 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

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What About Trade-Ins?

  • Determine the trade-in and retail value of your old car via the 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 and dealing with prospective buyers

Warranties l.jpg

  • 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 the expiration of the bumper-to-bumper warranty

  • Some features (such as seatbelts have a lifetime warranty)

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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

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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

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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

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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

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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?

Example should you lease or buy36 l.jpg
Example: Should You Lease or Buy?

  • If you lease, you’ll make lower monthly payments and a much lower up-front cost


Terminal Value of car: +$14,000

Total payments: –$17,784

Interest Lost: $360

4000 × 3% × 3 years

Lease termination fee: $0

Total Cost: –4,144


Terminal Value of car: $0

Total payments: –$10,764

Interest Lost: –$68

750 × 5% × 3 years

Lease termination fee: –$500

Total Cost: –11,332

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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)