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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

Chapter 7

Transportation and Household Purchase Decisions

  • 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
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



  • 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
a model of consumer decision making
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
benefits of a step by step approach
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
separating needs from wants
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
your rights as a consumer
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
your rights as a consumer10
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
sources of consumer assistance
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
sources of consumer assistance12
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.
how to complain and get action
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
taking third party action
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
the transportation decision
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
do you need a car
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
do you need a car17
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

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
how to purchase an automobile
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
how to purchase an automobile20
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
a new or a used car
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
web links
Web Links
  • LOTS of different web sites to help you determine a fair value for new and used cars
nada used car guide
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
choosing a new car dealer and closing the sale
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
negotiate with the dealer
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
tips for negotiating with car dealers
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
tips for negotiating with car dealers27
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
alternatives to negotiation
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
what about trade ins
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
  • 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)
financing the car purchase
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
sources of financing
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
evaluating low rate financing incentives
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
the leasing alternative
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
example should you lease or buy
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
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

tips for leasing
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)