Personal Finance: a Gospel Perspective

1. Personal Finance: a Gospel Perspective The Auto Decision

2. Objectives Understand how a car fits into your financial plan Understand key issues of car ownership C. Understand how to buy or lease a new vehicle and the lease versus buy decision D. Understand how to buy a used car

3. A. How does a Car Fit Into your Financial Plan? • Most important reasons • It’s a means of transportation • You have saved for it and it is within your budget • Less important reasons • Its fun (and fast) • It makes a statement about your lifestyle (as if you care)

4. How can a Car Hurt your Goals? • You borrow the money • Instead of earning interest, you pay it • Its not in your budget • It takes the place of more important goals • Its more than you had planned • It relegates more important goals to a lesser position

5. Questions • Do you know how a car fits into your personal financial plans?

6. Leasing Terminology • MSRP • Manufacturers hoped for price (if you are silly enough to pay it) • Capitalized cost • Your agreed on or negotiated cost • Capitalized cost reduction • Capitalize cost reduced by rebates, incentives, and trade in • Residual value • Expected value of the vehicle at term end • Lease term • The number of months the vehicle is leased

7. Leasing Terminology (continued) • Money factor • Way of expressing interest rates. It is the APR (in decimal form) divided by 24. • Why does the leasing industry use a money factor instead of interest rates? • I have no idea. This is how it was done in the past • What is it? • It is a way of calculating your interest costs • Average amount borrowed: (Cap cost+residual)/2 • Average interest rate: APR / 12 • Multiplied together: (Cap. Cost + residual) * APR / 24 (which is your money factor)

8. Application: Lease vs. Buy Analysis • You have negotiated the cost of a car and now wish to decide whether you should lease or buy. From the information below, make that determination based solely on costs. • Manufacturers Sugg. Retail Price (MSRP) 25,000 • Negotiated cost/Capitalized Cost 22,000 • Down Payment 2,000 • Lease Term and residual 3 Years, 55% • Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300 • Rent charge and Loan rate 8.35% • Sales tax 6.25%

9. MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%.

10. MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%. • Solution: Cost of Leasing • Down Payment and fees $2,000 • Taxes on Down Payment (2,000*.0625) 125 • Upfront Fees (Acq + Reg + Lic + Doc) 885 • Termination Fee 300 • Total Lease Payments: Depreciation (20,000 – 13,750 (55% of MSRP) 6,250 Finance Charges (est.: average outstanding * average rate) (20,000 + 13750) / 2 * .0835/12 * 36 months) 4,227 (also stated as (Remaining + Residual) * Money Factor Taxes (6,250 + 4,227)*.0625 655 Total lease payments of $11,132 • Total Cost of Leasing (DPF+LP) $14,442

11. MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%.

12. MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%. • Solution: Cost of Buying • Down Payment and fees $2,000 • Upfront Fees (Reg. + License + Doc.) 385 • Total Payments over holding period -20,000 PV, 8.35%, 36 N, PMT=629.96*36 22,679 • Taxes (22,000)*.0625 1,375 • Total Costs of Vehicle 26,439 • Market value of car at end of the loan (13,750) Total Cost of Buying DP+UF+TP+T-MV $12,689

13. Understand Key Issues in Auto Decisions • There are a number of important topics to understand before we discuss buying or leasing new or used vehicles. These include: • Holdback • Warranties • Service Contracts • Lemon Laws • 3. After You Have Found It • Vehicle History • Checked by a Mechanic • Maintenance records • 1. Choosing a vehicle • Goals and Budget • Safety Reports • Automobile Reports • Insurance • 2. Before You Go Looking • New/Used Vehicle Prices

14. Choosing a Vehicle:Your Goals and Your Budget • Know your goals and your budget • Have you written down your goals? • Are you living on a budget? • If you are planning to finance the vehicle (not recommended), are there sufficient funds to cover the costs and still attain your other goals • Are you putting aside money each month to purchase another vehicle in the future

15. Choosing: Vehicle Ratings and Safety • Pick a vehicle that is safe for your family • Where do you find information on vehicle safety and ratings? • There are a number of good sites. A good place to start is the National Highway Traffic Safety Administration site at www.nhtsa.gov, safer cars at www.safercar.gov, and the Insurance Institute for Highway Safety at www.iihs.org • You get information on safety ratings, crash tests and other important information about specific vehicles

16. Choosing: Automobile Reports • Pick a vehicle with a strong safety and repair record • Where do you find safety and repair information? • You can find good information at Consumer Reports on new and used vehicles at www.consumerreports.org. • There is a lot of great information at this source on vehicles and ratings

17. Choosing: Insurance • Pick a vehicle that is inexpensive to insure and drive • Which vehicles are more expensive to insure? • The Insurance Services Office (ISO) rates each vehicle on its loss history, with a number between 3 and 27. • The higher the number, the more expensive the coverage • Sports cars, high performance cars, and even SUV’s are more expensive to insure • Which vehicles are more expensive to drive? • Check the miles per gallon in the city and highway

18. 2. Before You Go Looking:New Vehicle Prices • Know what the dealer paid for the vehicle • Where can you get reliable estimates for new vehicle prices? • There are a number of automobile websites where you can get great estimates of what the dealer paid from the manufacturer, i.e., www.edmunds.com, www.autosite.com, or www.kbb.com. • Put in the manufacturer, model, and options and you can get the invoice price • Negotiations should begin at the invoice price

19. Before you Go: Used Vehicle Prices • Know the price range for the used vehicle you are looking at (good to excellent condition) • Where do you find information on used car prices? • You can generally find the same information on used cars, just as you do new cars. Key sources include www.edmunds.com, www.autosite.com, www.kbb.com, www.nada.com or www.vehix.com. • Know which guides are used in your area, i.e. Nada versus Kelly Blue Book

21. Before you Go: Holdback • Know the dealer Holdback • What is a holdback? • The holdback is a rebate to the dealer to compensate the dealer for holding the vehicle on his lot. Information on holdback is found at many different sources, including: http://www.edmunds.com/advice/incentives/holdback/ • Why is this important? • It is important for you to realize that even when the dealer sells a vehicle at this cost, he is still making money

22. Before you Go:Warranties • Know the warranty and period • What are warranties? • Warranties are assurances that goods are as promised and that any problems will be resolved • What are full warranties? • Full warranties are contracts that require: • 1. Product will be fixed at no cost to the buyer within a specified time • 2. Owner will not have to undertake unreasonable tasks to return the product • 3. Defective product will be replaced or the money returned if the product cannot be fixed

23. Before you Go:Service Contracts • Know available service contracts and providers • What are service contracts? • Agreements between the contract seller (dealer, manufacturer, etc.) to provide free (or with a deductible) repair services to covered components specified length of time or mileage after the original warranties are over. What should you be concerned about? • Contract terms: Items covered (power-train), length of coverage (i.e., 5 years), and mileage Contract seller: Who stands behind it. Generally service contracts from the manufacturer are better as you can get service nation-wide

24. Before you Go:Lemon Laws (Consumer Protection) • Know your rights as a consumer • What are lemon laws? • Laws established to protect the consumer in case the vehicle purchased is a “lemon” • How do you know if you have a lemon? • You are still having problems, and you have made: • 4 attempts to fix the problem, and • The car was out of service at least 30 days during the first 12 months or 12,000 miles • Take the car back and either get another car or your money back

25. After You Have Found It:Vehicle History • Get a vehicle history report • What is a vehicle history report? • It is a record of each and every time the vehicle was registered with a different owner in the records of the state • How can you get a copy of a vehicle history? • You can go to www.carfax.com. By putting in the Vehicle Identification Number (VIN), you can get a report as to the ownership and location of a vehicles history.

26. After You Have Found It:Checked by a good Mechanic • Get the vehicle checked by a qualified mechanic • How do you get it checked? • Take it to a qualified mechanic, preferably from a dealer for a major checkup • While it may cost between $80-250, it will be worth it if they find problems

27. After You Have Found It:Service Records • Review the service records of the vehicle • How do you check service records? • Sellers should have a copy of all service performed on the vehicle • Consumers should keep a record of all service performed • Dealers, oil change places, etc., often have records of when service was performed • Vehicles which have good service records were likely better taken care of than those without, and as such, command a higher premium

28. Questions • Any questions on keys issues in buying or leasing new and used vehicles?

29. C. Understand how to Buy or Lease a Vehicle and the Lease/Buy Decision • General Guidelines (the process): 1. Narrow your choices • Pick your vehicle • Determine your total price and negotiate for it • Finance the purchase if you must (lease) • Enjoy your purchase and keep it well maintained

30. 1. Narrow Your Choices • Comparison shop: price, product features, and quality. • Be informed: check library and Web sources. • Look at the alternatives • Fit your car into your budget—don’t make your budget fit your car! • Calculate your payments if you must finance it.

31. 2. Pick Your Vehicle • Do your comparison shopping (via the internet or publications) • Compare price • Compare features • Compare quality • Determine what is available in your price range. • Test-drive the exact vehicle you are considering.

32. 3. Determine your Total Price and Negotiate for It(Capitalized Cost) • Before you begin negotiations • Determine how much you can spend • Identify the car(s) you are interested in • Do your homework and find the dealer’s cost plus any: • Rebates • Holdback from manufacturer • Total markup • MSRP & dealer invoice • www.autosite.com, www.edmund.com

33. Negotiating (continued) • Start negotiations at dealers invoice • If they won’t share it, go someplace that will! • Both the Chevrolet and Ford dealers in the area were willing to share their invoices • Often invoice plus $500 will work • Dealer inventory often impacts difference between invoice and MSRP (demand & supply) • Date often affects dealers willingness to deal • End of month and end of year are particularly good times to buy

34. 4. Finance the Purchase (if you must)

35. 5. Maintain Your Purchase • Read the owner’s manual and perform regular maintenance • Particularly do oil changes every 3,000 miles • Don’t ignore warning signals. • You do at your peril! • Choose a good garage; check training and experience

36. Questions • Any questions on general guidelines on buying a new vehicle?

37. Application 2 • Consider the following costs of owning a vehicle valued and sold for $30,000. Calculate the total first year cost of ownership. • Auto Loan: Amount: $30,000, Duration: 4 years, APR: 8.65% • Property taxes: 2% of the vehicle value per year • Sales Taxes: 3% of the sales price • Title and Tags: $40 per year • Maintenance and Usage Costs: $1,500 per year • Insurance: $2,000 per year

38. Answer • $30,000 4 years APR 8.65% will have payments of $741.58 x 12 = • $8,898.91 payments in year 1 • $600 Property Tax • $900 Sales Tax • $40 Title/tags • $1,500 Maintenance/usage • $2,000 Insurance $13,938.91 for the total first year

39. Lease versus Buy: Buying • Advantages • You are protected in case of job loss or change • You can drive unlimited miles • No monthly payments • Vehicle can be used for any purpose • You can modify your car • Disadvantages • Higher up front costs • Expensive if you get a new car every few years

40. Lease versus Buy: Leasing • Advantages • Payments are usually lower, as you only pay for portion of car you use • Economical if you want new car every 2 to 3 years • You pay sales tax only on monthly payment. • Disadvantages • No flexibility in moving, high fees and fixed mileage • At the end of the contract you don’t own the car • Dealers sell you every few years and make money • Profits can be hidden due to complexities of leasing

41. The Leasing Process: 1. Negotiate the Price (first)!

42. Negotiate the Price First (continued) • Never walk into a dealership and announce you want to lease a car, and don’t talk payments either. • Any competent dealer can find a way to make a car fit your budget while maximizing his profits • Know beforehand which car you want and know how much you can afford

43. 2. Select the Lease Term: Know the Schedule

44. 3. Calculate Residual Value • Auto Residual Guides • Kelly Blue Book (kbb.com) • Edmund (edmund.com) • Important parameters • Year, make & model of auto • Term of lease • Apply residual ratio to MSRP to calculate residual value

45. Residual Value Example $30,000 Price, 7.44% rate, .56 Residual ratio, $30,000 MSRP X .56 Residual ratio (3 yr lease) $16,800 Residual value Then $30,000 Agreed upon price (may be the MSRP) <16,800> Residual value $13,200 Usage /Depreciation Fee (portion you are paying) divided by the months in the lease (36) $366.67 for the monthly depreciation payment

46. 4. Determine your Costs • Costs of Leasing • Up Front and End of Lease fees • Acquisition , Registration , License, and Document Fees (paid upfront), termination • Monthly • Usage/Depreciation (13,200 / 36 months)=$366.67 • Finance (($30,000+16,800) * MF or (.0744 / 24) = $144.30 per month • Sales Tax (366.67+ 144.30)=510.97 *.0625 = $31.94 • Total Monthly Cost of Lease = 366.67 + 144.30 + 31.94 = $542.91

47. 5. Maintain Your Purchase • Read the owner’s manual and perform regular maintenance • Particularly do oil changes every 3,000 miles • Don’t ignore warning signals. • You do at your peril! • Choose a good garage; check training and experience. • These are the same as for buying except: • If your lease extends beyond the manufactures warranty (generally 36 months), get an extended warranty to protect you!

48. Questions • Any questions on the lease versus buy decision?

49. D. Buying A Used Automobile • Key questions to ask on buying a used car: • 1. Can I afford this car? • Will it fit into my monthly budget? Is it a need? • 2. Does it meet my current driving needs? • What type of driving you do? Shop for a car that meets your driving patterns • 3. Will it meet my future needs? • Consider how you will feel about this car a year or two from now. Will your family be growing? • 4. What are your preferences? • What about gas mileage, sedan/SUV/truck, 2-door/4-door, safety?

50. Getting the Best Deal • The cost of a vehicle is based on its reliability, performance and popularity • Of course you want a car that is reliable and performs well. But do you want the same used car everyone else wants? • If so, you will pay a premium for it. In some cases, the only difference is the nameplate • Check reliability at www.consumerreports.com • Check your needs versus wants!