Chapter 8

1. Chapter 8 Vehicle and OtherMajor Purchases

2. Learning Objectives • Explain the three steps in the planned buying process that occur prior to interacting with sellers. • Describe the process of comparison shopping. • Negotiate and decide effectively when making major purchases. • Use effective complain procedures.

3. Introduction Planned Buying entails thinking through all of the details of purchase from the initial desire to buy to your satisfaction after the purchase. There are seven distinct steps in planned buying.

4. The Stepsin Planned Buying

5. How To Buy Smart • Become a content expert – talk to product users • Preshopping Research: Gathering information before actually beginning to interact with sellers. • Don’t buy on impulse • Do Not Pay Extra for a Name (use Generics) • Buy at the right time • Pay Cash, if possible • Convenience has a cost

6. How To Buy Smart • What price should you expect to pay? • Manufacturer’s Suggested Retail Price(or MSRP): The suggested initial asking price. • Dealer Sticker Price: Includes additional charges tacked on by the dealer. • What is a fair interest rate? • http://www.bankrate.com • Loanpreapproval - Helps determine how much you can borrow at a specific at a specific interest rate

7. How To Buy Smart Questions to Ask: • Is a rebate available? • Rebate: A partial refund of a purchase price offered as an inducement to buy. • Should you take a rebate or low-rate financing? • Chapter 8 Learning Activity as example • What is my trade-in worth? • http://www.kbb.com or • http://www.edmunds.com • Can I afford it? or What Trade-Off is needed?

8. Fitting a Vehicle Payment into a Monthly Budget

9. How To Buy Smart • Use comparison shopping to find the best buy. • Comparison Shopping (at least 3 choices) • Best Buy – acceptable quality at a fair price • Obtain a loanpreapproval for the lowest rate • Compare financing options. • Consider leasing instead of buying. • Leasing: Renting a product while the ownership title remains with the lease grantor.

10. Leasing Terminology Gross Capitalized Cost – includes price of vehicle plus finance charges paid plus insurance or maintenance. Capitalized Cost Reductions – money paid on the lease at inception such as down payment, trade-in-value, or rebate. Adjusted Capitalized Cost – difference between capitalized cost reductions and gross capitalized cost. Residual Value – the projected value of a leased asset at the end of the lease period. Money Factor – the rent charge portion of the monthly payment.

11. Leasing Terminology • Open-end lease– Protects the leasor by requiring payment for end of lease value difference between residual value and fair market value. • Ex: Residual Value of $10,000 has market value of $9,500 requires a $500 payment at lease end. • Closed-end lease(or walkaway lease) – Protects the leasee as no charge occurs if the market value is different than residual. • End of Lease charges may apply for mileage above max. limit such as $0.30 each mile above 60,000 miles or greater than normal wear.

12. Leasing Terminology • Additional leasing fees: • Disposition fee – assessed for preparing vehicle for resale such as cleaning, repairing, painting, etc. • Early termination charge – assessed if lease ends prematurely to compensate leasor for lost interest • Early termination payoff – amount based upon remaining lease balance due plus early termination charge. • Balloon automobile loan: another alternative to a lease, in which you buy a vehicle with low monthly payments and the last monthly payment equaling the projected residual value of the vehicle at the end of the loan period.

13. Comparing AutomobileFinancing and Leasing • Example: Four-year (48 month) Car Lease vs. Loan: • Car Cost = $18,900, Interest Rate = 9% • Assume Residual Value of 50% • Residual Value – ($18,900 * 50%) = $9,450 • Lease Rate - .0038 (.0038 = 0.09/24) $18,900 - $9,450 = 9,450/48 = $196.88 Lease Payment • $18,900 base + $9,450 residual = $28,350 Avg. total cost of lease financing • $28,350 * .0038 = $107.73 Lease Charge/Mo. • $196.88 + $107.73 Lease Charge/Mo = $304.61 (Base Payment) • $304.61 * 7.75% (tax rate) = $23.61 + $304.61 = $328.22 (Total Lease Payment) • Table 7.1 - $18.9 X 24.88 = $470.33 Loan vs. $328.22 Lease Payment

14. Compare Warranties • Warranty – buyer assurance the product delivered meets commitments with defined steps to resolve any discrepancies that occur. • Implied Warranty – required by state law to guarantee product performance whether or not a written warranty exists unless sold “as-is.” • Express Warranties – Written or oral warranty for products over $15 that provides remedy for a buyer. • Full Warranty – 3 requirements: Product fixed at not cost to buyer; return should not be unreasonable to buyer and money will be returned if not fixed. • Extended warranties are overpriced – provides for repair or replacement of covered components for some specified time period. Popular for car, appliance and electronic products. 80% of service agreements are never used.

15. Negotiation • Negotiating (or haggling) • Suggest negotiate effectively and decide at home • Successful negotiators are armed with information and plan in advance • Negotiate your price. • New-Vehicle Buying Service • Professional Shoppers (carsdirect.com) • Invoice Price (or Seller’s Cost) • Dealer Holdback (or Dealer Rebate) % reduction of invoice paid to manufacturer

16. Negotiation • Negotiate your interest rate. • Get a firm price for the vehicle. • Negotiate the lowest possible APR through the dealer. Borrow elsewhere if the rate is lower. • Obtain a firm commitment on a trade-in allowance. Sell the vehicle yourself if the allowance is too low. • Negotiate your trade-in

17. Decision-Making Grid • Determine criteria importance and weight each • Score each alternative and select highest score

18. Evaluate Your Decision • Redress – Understand the process of righting a wrong from purchase decision • Alternative Dispute Resolution Programs – Industry or government sources such as the better business bureau or Consumer Protection Agency who assist buyers with disputes. • Mediation – neutral third party involved to resolve dispute between both parties and may include arbitration • Arbitration – neutral third party hears the claims made and issues a ruling that is binding on or both parties. • Lemon Laws – Guidelines for arbitrator’s to use when requiring a dealer to repurchase a car. Go to http://www.carlemon.com/lemon/NE_law.htmlfor specific laws in Nebraska • Small-Claims Court – civil court procedure for disputes ranging from $500-$2,500

19. Suggested Dispute Resolution • Start with original contact during sale for dispute • Escalate to supervisor or manager if not resolved • Document date, time, name and actions agreed • Use logic and avoid emotional appeal for solution

20. TheTop 3 Financial MisstepsIn Big-Ticket Purchases People experience challenges when they do the following: • Rely solely upon the seller as their source of information for price, financial terms, and trade-in value. • Tell a seller what they can afford to pay so the seller can avoid disclosing his or her lowest price. • Don’t complain when products fail to perform as expected.

21. Good Money Habits in Vehicleand Other Major Purchases • Think through all of your major purchases using the planned buying process. • When planning to buy vehicles, check repair ratings history in Consumer Reports magazine. • Purchase late-model, high-quality used vehicles and check their ownership history at www.carfax.com and recall history at www.nhtsa.gov. • Obtain price information from at least three sources and aggressively negotiate prices and financing terms for major purchases. • Promptly and firmly seek redress when dissatisfied with purchases or services.