Research and Reflect
8 Vehicle and Other Major Purchases
YOU MUST BE KIDDING, RIGHT?
When Dora Marquez graduated from college three years ago, she really wanted a fully equipped Honda Civic. Her monthly payment would be about $350 per month, about $70 more than she could afford. To help Dora meet her budget, the dealer suggested that she lease the vehicle and offered a 42-month lease option at $270 per month with a driving maximum of 12,000 miles per year. The contract had a $0.30 per mile fee at the end of the lease for any excess mileage. Now, with six more months on her lease, Dora is already 1500 miles over the 42,000 (3.5 × 12,000) mileage limit in her contract. What is Dora's best option at this point?
A. Turn back the vehicle now and pay the $450 (1500 × $0.30) for excess mileage.
B. Try to cut back on her driving to minimize her excess mileage fee, which could be higher than $2500 if she keeps driving at the same rate as she has been.
C. Stop driving the car and pay $450 for excess mileage when she turns it back at the end of the lease.
D. Continue driving the vehicle and buy it at the end of the lease by paying the residual value agreed upon when she entered into the contract.
The answer is D. None of the other options is financially practical. Dora learned a hard lesson. Leases may have a lower monthly payment but have hidden costs that often are not known until the very end of the contract!
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Explain the first 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 complaint procedures.
WHAT DO YOU RECOMMEND?
David and Lisa Cosgrove of Tacoma, Washington, are in their early 40s and have three children. They own three vehicles. Lisa drives an almost-new Toyota Camry; David uses a five-year-old Ford pickup; and Alyssa, the couple's 17-year-old daughter, drives a ten-year-old Dodge. Recently, a fire in their garage destroyed both the Dodge and the Camry. The Cosgroves received an insurance settlement of $21,900 on Lisa's car, although the loan payoff amount was $22,800. Alyssa's Dodge was not insured for fire. The couple wants to obtain replacement cars that are similar to those destroyed.
What do you recommend to David and Lisa on automobiles and other major purchases regarding:
1. How to search for two vehicles to replace those destroyed?
2. Whether to replace Lisa's vehicle with a new or used vehicle?
3. Whether to lease or buy a vehicle?
4. How to decide between a rebate and a special low APR financing opportunity if they decide to purchase a new vehicle for Lisa?
5. How to negotiate with the sellers of the vehicles?
YOUR NEXT FIVE YEARS
In the next five years, you can start achieving financial success by doing the following related to vehicle and other major purchases:
1. Check repair ratings history in the April issue of Consumer Reports magazine when planning to buy vehicles.
2. Purchase late-model, high-quality used vehicles and obtain a vehicle history report at www.carfax.com and www.autocheck.com and any recall history at www.nhtsa.gov .
3. Obtain price information from at least three sources and aggressively negotiate prices and financing terms for major purchases.
4. Never tell a seller what payment you can afford.
5. Promptly and firmly seek redress when dissatisfied with purchases or services.
Planned buying entails thinking about the details of a purchase from the initial desire to buy to your satisfaction after the purchase. You should use planned buying principles any time, but they are especially important when you are buying a vehicle or making other major purchases. You can save thousands of dollars when buying a car and hundreds of dollars when purchasing a television. You just need to learn how to do it. If you do not plan your buying in such circumstances, you will waste money, and this will detract from your overall financial success in life.
The seven distinct steps that lead you through the planned buying process are illustrated in Figure 8-1 . Steps 1, 2, and 3 occur before you interact with sellers: determining your needs and wants, performing preshopping research, and fitting a purchase into your budget. Comparison shopping and other interactions with sellers comprise the 4th step in the buying process. Steps 5 and 6—negotiating and making the decision—follow. The 7th and final step—evaluation of the decision—is taken after making the purchase. After reading this chapter, you will understand enough about the planned buying process to save money when buying expensive goods while still meeting your needs and many of your wants.
8.1 DO YOUR HOMEWORK BEFORE YOU BUY
Let's look now at the first three steps in planned buying, all of which should occur before you actually interact with sellers. They are, in a sense, the homework you do when preparing to buy.
LEARNING OBJECTIVE 1
Explain the first three steps in the planned buying process that occur prior to interacting with sellers.
A need is something thought to be a necessity; a want is unnecessary but desired. In truth, very few needs exist. Yet in everyday language, people talk too often of “ needing” certain things. Calling something a need makes it no longer open to careful consideration. Instead, consider all purchase options to be wants. Of course, some wants are more important than others. That is why you must prioritize your wants and consider the benefits and costs of each want. Costs should include opportunity costs as measured by some other want or goal that will become less attainable if a given want is satisfied. For example, buying a car with a retractable sunroof might mean that you cannot afford to purchase one with a remote start feature.
need Item thought to be necessary.
want Item not necessary but desired.
Figure 8-1 The Steps in Planned Buying
Setting priorities becomes difficult when a decision is complex such as when buying a car or home. Consider the case of Haley Wilson, a physical therapist from St. Paul, Minnesota. Haley has been late to work several times in the past few months because her 12-year-old car has been having too many mechanical problems. Haley wants to avoid being late. But how? Should she buy a new car or a used car, lease a new car, repair her current car, or take the bus to work? After considering these options, Haley decided to buy a new car. Now she must determine which features are of high or low priority. To do so, Haley developed the worksheet shown in Figure 8-2 . Such a worksheet makes it easier to formalize her wants.
Avoid Impulse Buying
Buying too quickly without fully considering priorities and alternatives is called impulse buying . It wastes money, and impulse buyers often do not buy what they really want and later on they too often regret their decisions.
impulse buying Buying too quickly without fully considering priorities and alternatives.
8.1b Get Smart and Conduct Some Preshopping Research
Smart shoppers learn as much as they can about a product or service before buying. This process starts with preshopping research —gathering information before actually beginning to interact with sellers. Manufacturers, sellers, and service providers are all important sources of information about products and services during preshopping research. Two other sources are friends and consumer information in print and on the Internet.
preshopping research Gathering information before actually beginning to interact with sellers.
Figure 8-2 Priority Worksheet (for Haley Wilson)
Bias Toward the Familiar and Comfortable
People engaged in understanding vehicle and major purchases have a bias toward certain behaviors that can be harmful, such as a tendency toward the familiar and comfortable. People often keep buying the same items and name brands when making major purchases. What to do? Treat every major purchase as a new opportunity; then carefully go through the planned buying steps to make the best choice.
When buying vehicles you should always research vehicle reviews in Consumer Reports, which is the only magazine that objectively tests and reports on numerous product categories. Monthly issues of Consumer Reports generally provide a two- to five-page narrative analyzing the products and summarizing the information in chart form. Consumer Reports Buying Guide, which is published every December, lists facts and figures for all kinds of products. And each year, the April issue of Consumer Reports is devoted entirely to the purchase of automobiles. All this and more can be seen at www.ConsumerReports.org .
Know the Price You Should Expect to Pay Advertising is often a key source of information about prices. You can also obtain price information through catalogs, on the telephone, and over the Internet. This situation differs for big-ticket items. While the prices of furniture, appliances, and vehicles may be advertised, that price is almost never the lowest price you can expect to pay. This is because sellers of big-ticket items typically have the authority to negotiate an even lower price, if necessary, to make a sale. You should have a clear understanding what price to expect to pay before going out to shop. Otherwise, you risk negotiating a price higher than necessary.
Break the Dealer's Code on New Vehicle Prices You will see two prices when you walk into a vehicle dealer's showroom: (1) manufacturer's suggested retail price, and (2) dealer invoice price. Both are artificial numbers; thus your negotiation effort should not be to get close to the dealer invoice price but to a lower real price you may decide to pay. The manufacturer's suggested retail price (MSRP) is the retail price set by the manufacturer and posted on the federally required side window sticker. The dealership wants you to pay full MSRP plus any miscellaneous charges.
manufacturer's suggested retail price (MSRP) The retail price set by the manufacturer and posted on the federally required side window sticker.
The dealer invoice price (or base invoice price ) is the amount the automaker charges the dealership for new vehicles at the time the dealer buys them, and it does not reflect some discounts that the dealer gets. The invoice price typically has some additional charges tacked on by the dealer, which are attempts to generate additional revenue.
dealer invoice price (base invoice price) The amount the automaker charges the dealership for new vehicles at the time the dealer buys them; it does not reflect some discounts that the dealer gets.
Research Online Product Reviews
Taking time to read online reviews of products and services may yield useful information in making buying decisions. Take time to read both anonymous praise and critical comments on sellers' websites as well as blogs. Some positive postings might be written by company minions, while some negative ones may be the work of unscrupulous competitors. It is best to ignore occasional extreme reviews and focus on the general tone.
Web Sources Are Best for Price Information on Vehicles Edmunds.com reports that the average price for new cars and trucks is over $32,000. Smart buyers can research the average retail and wholesale prices on new and used vehicles by visiting the websites for Edmunds (www .edmunds.com), Kelley Blue Book ( www.kbb.com ), or the National Automobile Dealers Association ( www.nadaguides.com ).
Know the Value of Your Trade-in Vehicle When buying vehicles, it is common but not always advantageous, to trade in an old model when buying a new one. Vehicle buyers should know the true value of any vehicle they will trade in. Using the websites mentioned earlier, you may find the likely trade-in value of your vehicle (the wholesale price) as well as the amount you could sell it for yourself (the retail price). Armed with this information, you can more effectively negotiate a good trade-in allowance on your existing vehicle with a dealer. If you don't get a good offer on your vehicle from the dealer, shop at another dealer or consider selling it yourself.
Gauge Environmental Impact Many products such as vehicles, electronic equipment and household appliances have an impact on the environment. This factor is part of many people's purchase decisions and relevant information is often available. For example, window stickers on new vehicles include both estimated annual fuel costs and the vehicle's overall environmental impact. The labels also compare vehicles across classes so potential buyers can make more informed decisions.
When considering a big-ticket item everyone wonders, “Can I afford it?” An unaffordable cash purchase can wreck your budget for one or two months. However, the negative effects of an ill-advised credit or lease contract may last for years.
Many People Are Slow to Replace Their Cars
Surveys show that about 15 percent of vehicle owners replace their cars before they have 100,000 miles, more than half get another vehicle when the old one has between 100,000 and 250,000 miles on the odometer, and about one-quarter wait for 250,000 or more miles.
Consider the Cost per Use One way to view the cost of a major expenditure is to consider the cost per use of the product. For example, Dylan Lenz, an engineer from Dothan, Alabama, is considering buying a hot tub spa. He has researched several models and knows he would pay about $5000 for a model he likes including installation. Dylan figures that he would use the spa about 100 times per year and expects the spa to last about ten years, giving him 1000 uses. Dividing this figure into the price of a $5000 model yields a cost per use of $5($5000/1000), excluding the cost of chemicals, maintenance, and electricity to heat the unit. Dylan must consider if it is worth more than $5 each time he uses the spa and whether he will really use it about twice per week year in and year out.
Fit the Payment into Your Monthly Budget Many big-ticket items require the use of credit resulting in an impact on one's budget for many months in the future. To gauge this impact, consider how Haley Wilson (see Table 8-1 ) might fit a new car into her budget. She estimates that the dealer invoice price of the car she wants will be about $28,000. This price does not include her highest-priority wants. These options will likely add about $3300 more to the dealer invoice price: air conditioning, $700; automatic transmission, $600; leather seats, $700; capless fuel filler, $100; power windows, $400; top-level sound system, $600; and satellite ratio, $200. Buying a car with these features will run the cost up to $31,300 ($28,000 + $3300 for the options). She expects to use $3500 from her savings account as a down payment, receive $2000 for trading in her old car, and borrow the remaining amount.
DO IT IN CLASS
The actual price she will pay for the car will depend on her ability to negotiate the final price down from the dealer invoice price. From her preshopping research, Haley knows that the final agreed upon price should be about 12 percent less than the dealer invoice price. Haley figures she should be able to negotiate the price of the purchase down by at least 10 percent from $31,300 to $28,170 ($31,300 − $3130 [$31,300 × 0.10]).
The final cost Haley will pay depends on (1) the price she actually pays for the car, (2) the amount of the down payment, (3) the time period for payback of the loan, (4) the amount she receives in trade for her old car, and (5) the interest rate on the vehicle loan. Assuming a car price of $28,170 and another $830 for sales tax and title fees to register the vehicle, Haley will need to finance about $29,000 ($28,170 + $830). The monthly payment over 48 months for a 5 percent loan could be about $668 a month (from Table 7-1 on page 213 [$23.03 × 29]).
Time invested in preshopping research pays off in better purchase decisions.
Fit the Vehicle Payment into a Monthly Budget The next challenge is to determine if a possible vehicle payment is truly affordable. Haley tried to fit the $668 car payment into her budget as shown in Table 8-1 .
Table 8-1 shows Haley's monthly budget. She started with the fact that her take-home pay of $2440 is totally committed, including $200 in monthly savings. So she juggled the numbers to see if she could finance a new car and found she could only find $330. That's far short of the $668 needed for a monthly payment. By taking out a longer, 60-month 5 percent loan, she could reduce her payments to about $547 per month (29 × $18.87 from Table 7-1 on page 213). Haley's choices are to make more cutbacks in her budget, work overtime, get a part-time job, or buy a less expensive vehicle.
Table 8-1 Fitting a Vehicle Payment into a Monthly Budget (Haley Wilson's $2440 Disposable Income)
How Many Hours of Work Will This Item Cost?
When buying a new vehicle, computer, television, or any big-ticket item, divide the cost of the item by your hourly take-home pay. For example, if you divide the cost of a $360 camcorder by $15 take-home pay ($22 hourly minus taxes), that tells you that you must work 24 hours to pay for it.
Alternatively, Haley could finance the car over more months. Thirty-three percent of new cars are financed for 73 to 84 months and over 20 percent are financed over 61 to 72 months. While this lowers the monthly payment, it extends the loan for a long time (perhaps longer than you want to drive the vehicle) and it costs a lot more in total interest. Perhaps she might qualify for a lower interest rate, maybe 3½ percent, at the new car dealer. Then again, Haley could forget the new car entirely and look for a used vehicle that is affordable.
CONCEPT CHECK 8.1
1. What is planned buying?
2. Distinguish between needs and wants, and explain why it may be better to act as if no needs exist.
3. Describe the types of information you need to be your own expert when making big-ticket purchases.
4. Summarize the process to determine whether you can afford a particular purchase.
How to Buy a Safe Car
The following pointers may help you buy a safer vehicle:
• Check government safety test results. The federal government crash-tests motor vehicles to analyze their safety. For results on various makes and models, call the National Highway Traffic Safety Administration (NHTSA) “auto hotline” at (800) 424-9393 or visit www.safercar.gov .
• Consider a vehicle with extra airbags. Consider models that provide head, knee, rear-curtain, seat-belt, and/or rear-seat-center airbags.
• Check on recalls. When buying a used car, visit SaferCar.gov to see whether the vehicle has been recalled. If so, confirm that the repairs have been made to the car you are considering; if not, buy elsewhere. Dealers are required to fix for free vehicles recalled for safety reasons.
8.2 USE COMPARISON SHOPPING TO FIND THE BEST BUY
Comparison shopping is the process of comparing products or services to find the best buy. A best buy is a product or service that, in the buyer's opinion, represents acceptable quality at a fair or low price for that level of quality. Purchasing the product with the lowest price does not necessarily ensure a best buy because quality and features count, too.
comparison shopping Process of comparing products or services to find the best buy.
best buy Product or service that, in the buyer's opinion, represents acceptable quality at a fair or low price for that quality level.
Prices on big-ticket items such as autos, furniture, appliances, and electronic equipment are rarely the same from seller to seller and vary from week to week. You can begin your comparison shopping online, but most likely you will need to visit different stores to see the products. Experts recommend that consumers use the “rule of three” when shopping at stores. This means comparing at least three alternatives before making a decision.
8.2a Compare Financing Options
The lowest payment does not mean the best credit plan. Better credit terms are frequently available at lenders not associated with sellers such as your credit union or bank that can lend money to make purchases for vehicles and household appliances and other big-ticket items. Also check rates on websites such as www.bankrate.com or www.interest.com .
Avoid Long-term Borrowing Beware of taking out a longer loan on a vehicle purchase, such as for five or more years, because the value of your vehicle may be less than the amount you owe for half or more of those years. This is known as being upside down due to negative equity. If you default on the loan or sell the vehicle, you will have to make up the difference. Rolling the negative equity forward into the car financing of the next vehicle purchase means that the amount will be added to the price of the new car.
upside down A situation where the owner of a financed asset owes more than it is worth, thus creating negative equity.
When talking with sellers, consider “same as cash” offers on furniture, appliances, and electronics that allow you to delay interest or payment for, perhaps, 90 days to one year. If the product is paid off during this time period, you will not incur any finance charges. Be wary, however, because interest will be charged retroactively if a payment is late or if the purchase isn't fully paid off during the required time period.
When shopping for an automobile and going on a test-drive, tell the seller not to use your Social Security number or driver's license number to access your credit report and estimate how much you can afford to pay and your ability to obtain financing elsewhere.
LEARNING OBJECTIVE 2
Describe the process of comparison shopping.
What Is a Fair Interest Rate? A borrower with a high credit score who can get a 1 percentage point reduction in interest for a $15,000 loan over 48 months can save hundreds of dollars in interest paid over the life of the loan. You should note that the credit score used on vehicle loans will be different than the one you might obtain on your own. Credit bureaus have developed specialty scores for vehicle lending that have a heavier weighting placed on past experiences the borrower has had for those types of loans. Buyers should obtain multiple quotes from credit unions and banks. When shopping for a major purchase, ask your local credit union or bank for a loan preapproval before you visit sellers. This preshopping step will let you know how much you can borrow and at what interest rate.
Choose Between a Low Interest Rate and a Rebate Often a good source of loans for new vehicles is sales financing arranged through the dealer or manufacturer. The interest rate on this credit is usually low when manufacturers or dealers want to generate additional sales volume.
Many sellers also offer rebates to encourage people to buy. With a rebate, the seller refunds a portion of the purchase price of the product either as a direct payment or a credit against future purchases (often through a gift card). Vehicle manufacturers offer rebates of $1000 to $5000 to purchasers of new vehicles as a way to generate more sales volume or to help sell slow-selling models. In most cases, the buyer must choose between the rebate and a low APR loan offer also being offered by the manufacturer. Some people choose to borrow the full price elsewhere and receive the rebate in cash. In effect, this option means that they are borrowing more money than the vehicle actually costs. Plus, the buyers also lose out on the opportunity for the low APR offer.
Seven Things to Buy Used
Most everyone knows that used vehicles are a good option when the time comes to make a purchase. But a number of other products can be bought used as well with good quality for a low price. Sources such as eBay, Craig's List, Amazon, Goodwill Industries, the Salvation Army, consignment shops, and even garage sales can be a good source for used:
1. Fitness equipment—many people buy treadmills, elliptic trainers, stationary bikes and other such items and rarely use them. When the time comes to sell they are selling almost new items.
2. Furniture and appliances—Serviceable used furniture can be a good buy for young people just starting out or people who have moved into a larger dwelling and want to wait to furnish it fully.
3. Baby gear and clothing—Why buy new when the baby will outgrow the items in a few short months?
4. Jewelry—Buying wedding bands at a pawnshop may not be romantic but when money is tight nice items can be had at a fraction of the cost of new.
5. Electronics—many people want the very newest electronics and trade in or sell items that are technologically current.
6. Tools—many do-it-yourselfers buy tools for jobs they will not do again and will sell items that have used only a few times.
7. Sporting equipment—Golf clubs, skis, bicycles, and roller blades have winning prices at stores specializing in used equipment.
People Waste Rebates
Only about half of people who buy manufacturers' products that offer rebates actually take the time to complete and mail in the forms to obtain the money. The rate is even lower on items costing less than $50. Advice: Complete and mail such forms as soon as you return home with the purchase.
The Run the Numbers worksheet on page 231 provides a way to calculate whether a rebate or low APR financing is the better option. If you do decide to take the rebate on a new vehicle, you should apply the money to the down payment on the vehicle or pay extra on the first monthly payment on the loan. Rebates are common when purchasing products such as vehicles, cell phones, and computers. The most current details on manufacturers' rebates to both consumers and auto dealers can be found at Edmunds.com ( www.Edmunds.com ). Just type in “rebates” on the Internet for others.
8.2b Compare Leasing to Buying
Leasing a new vehicle is an increasingly attractive option to people who are in the market for a car. More than 28 percent of the new cars “sold” in a recent year were actually leased. A person leasing a vehicle does not actually own the vehicle. With a lease on a vehicle or any other product, you are, in effect, renting the product while the ownership title remains with the lease grantor.
lease Rental of a product while ownership title remains with the lease grantor.
Is leasing a better deal than financing? It could be. Note first that the monthly cost of leasing is always lower than a purchase. This is because the payment is primarily based on the depreciation of the vehicle over the lease time period and also because in most states the sales tax is calculated on the monthly lease payment rather than the full purchase price. Still, you cannot answer this question until you understand some rules and risks of leasing.
Regulation M issued by the Federal Reserve Board governs lease contracts. A requirement of this regulation is a mandatory disclosure of pertinent information about the lease that the consumer is considering. The disclosure form must summarize the offer of the lessor (leasing agency) to the lessee (consumer). The information in this form should be compared with the actual lease contract prior to signing to ensure that the lease signed is actually what was agreed upon verbally.
Choosing Between Low-Interest-Rate Dealer Financing and a Rebate
Advertisements for new vehicles often offer low APRs for dealer-arranged loans. A cash rebate of $1000 to $3000 (or more) off the price of the car may be offered as an alternative to the low interest rate. If you intend to pay cash, then the cash rebate obviously represents the better deal. But which alternative is better when you can arrange your own financing?
To compare the two APRs accurately, you must add the opportunity cost of the forgone rebate to the finance charge of the dealer financing. The worksheet provides an example of this process. Suppose a dealer offers 2.9 percent financing for three years with a $907 finance charge. Alternatively, you can receive a $3000 rebate if you arrange your own financing. The price of the car before the rebate is $22,000. Assume you can make a $2000 down payment and that you can get a 6.5 percent loan on your own. This worksheet can be found on the Garman/Forgue companion website, or you can find similar worksheet at www.bankrate.com/calculators/auto/car-rebates-calculator.aspx .
DO IT IN CLASS
The lower of the values obtained in steps 3 and 4 is the better deal. In this instance, the financing that you arranged on your own is more attractive. In fact, any loan you arrange that carries an APR lower than 12 percent compares favorably with the dealer-arranged financing in this case.
|
Step |
Example |
Your Figures |
|
1. Determine the dollar amount of the rebate. |
$3000 |
_________ |
|
2. Add the rebate amount to the finance charge for the dealer financing (dollar cost of credit). |
+ $ 907 |
_________ |
|
3. Use the formula from Chapter 7 (Equation [7.2] on page 215 and used here as Equation [8.1]) to calculate an adjusted APR for the dealer financing. |
|
|
where
APR = Annual percentage rate
Y = Number of payment periods in one year
F = Finance charge in dollars
D = Debt (amount borrowed)
P = Total number of scheduled payments
|
4. Write in the APR that you arranged on your own. |
6.5% |
_________ |
Leasing Terminology Five terms are important in leasing:
1. The gross capitalized cost (gross cap cost) includes the price of the vehicle plus what the lessee paid to finance the purchase plus any other items the lessee agreed to pay for over the life of the lease, including insurance or a maintenance agreement.
gross capitalized cost (gross cap cost) Includes vehicle price plus the cost of any extra features such as insurance or maintenance agreements.
2. Capitalized cost reductions (cap cost reductions) are monies paid on the lease at its inception, including any down payment, trade-in value, or rebate.
3. The adjusted capitalized cost (adjusted cap cost) is determined by subtracting the capitalized cost reductions from the gross capitalized cost.
adjusted capitalized cost (adjusted cap cost) Subtracting the capitalized cost reductions from the gross capitalized cost.
4. The residual value is the projected value of a leased asset at the end of the lease time period.
residual value Projected value of a leased asset at the end of the lease time period.
5. The money factor (or lease rate or lease factor) measures the rent charge portion of your payment. Although the money factor is sometimes described by dealers as a figure for comparing leases, lease forms must carry the following disclosure about the money factor: “This percentage may not measure the overall cost of financing this lease.”
What is most important when considering leasing? Always negotiate the purchase price before discussing a lease! Leasing requires an initial outlay of cash to pay for the first month's lease payment and a security deposit. Payments are based on the capitalized cost of the asset minus any capitalized cost reductions and the residual value. This difference represents the cost of using the asset during the lease period; when divided by the number of months in the contract, it serves to establish the base for the monthly lease payment. (Some new vehicles are offered with single-payment leases in which the entire difference between the capitalized cost and residual value is paid up front.) With monthly payment leases, the payments are lower than monthly loan payments for equivalent time periods because you are paying for only the reduction in the asset's value—not its entire cost. To compare the costs of leasing versus buying, use the Run the Numbers worksheet, “Comparing Automobile Financing and Leasing.” Also see www.leasecompare.com .
Open- and Closed-End Leases A lease may be either open end or closed end. In an open-end lease, you must pay any difference between the projected residual value of the vehicle and its actual market value at the end of the lease period. When a vehicle depreciates more rapidly than expected, the holder of an open-end lease has to pay extra money when the lease expires. For example, a vehicle with an $11,000 residual value but a $10,250 market value would require an end-of-lease payment of $750 ($11,000 − $10,250). The Consumer Leasing Act limits this end-of-lease payment to a maximum of three times the average monthly payment.
Most vehicle leases are closed-end leases. In a closed-end lease (also called a walkaway lease ), the holder pays no charge if the end-of-lease market value of the vehicle is lower than the originally projected residual value. However, closed-end leases may carry some type of end-of-lease charge if the vehicle has greater than normal wear or excess mileage. For example, a four-year closed-end lease might require a $0.30 per mile excess mileage charge in excess of 55,000 miles. If you actually drove the vehicle 60,000 miles during the four years, you would be charged an extra $1500 [$0.30 × 5000 (60,000 − 55,000)].
closed-end lease/walkaway lease Agreement in which the lessee pays no charge if the end-of-lease market value of the vehicle is lower than the originally projected residual value.
excess mileage charge Fees assessed at the end of a lease if the vehicle was driven more miles than originally specified in the lease contract.
Comparing Vehicle Financing and Leasing
This worksheet can be used to compare leasing and borrowing to buy a vehicle. Remember that the cost of credit is the finance charge—the extra that you pay because you borrowed. Leases also carry costs, but they are hidden within the contract. Indeed, some may remain unknown until the end of the lease period. These lease costs, which are indicated by an asterisk (*), are negotiable and are defined in the text. Ask the dealer for the price of each item, as these fees must be disclosed by dealers. Then complete the worksheet and compare the dollar cost of leasing with the finance charge on a loan for the same time period.
To make the comparison accurately, you must know the underlying price of the car as if you were purchasing it. Often you are not offered this value with a lease arrangement, so you should always negotiate a price for the vehicle before mentioning your interest in leasing.
DO IT IN CLASS
Also, shop for a lease through dealers and independent leasing companies because costs vary widely. This worksheet can be found on the Garman/Forgue companion website, or you can find a similar worksheet at www.bankrate.com/calculators/auto/buy-or-lease-calculator.aspx .
|
Step |
Example |
Your Figures |
|
1. Monthly lease payment (36 payments of $375, for example) |
$13,500 |
________ |
|
2. Plus acquisition fee* (if any) |
300 |
________ |
|
Plus disposition charge* (if any) |
300 |
________ |
|
Plus estimate of excess mileage charges* (if any) |
0 |
________ |
|
Plus projected residual value of the vehicle |
4,500 |
________ |
|
3. Amount for which you are responsible under the lease |
18,600 |
________ |
|
4. Less the adjusted capitalized cost (gross capitalized cost* less the capitalized cost reductions*) |
16,000 |
________ |
|
5. Dollar cost of leasing to be compared with a finance charge if you purchased the vehicle |
2,600 |
________ |
With either an open- or closed-end lease, you may purchase the vehicle at the end of the lease period. With an open-end lease, you would pay the actual cash value. With a closed-end lease, you would pay the residual value.
Understand Common Leasing Fees Other charges are possible with a lease. An acquisition fee is either paid in cash or included in the gross capitalization cost. It pays for a credit report, application fee, and other paperwork. A disposition fee is assessed when you turn in the vehicle at the end of the lease and the lessor must prepare it for resale. An early termination charge may also be levied if you decide to end the lease prematurely. Be wary of a lease with an early termination charge, even if you do not plan to end the lease early, because termination also occurs when a leased vehicle is traded in or is totally wrecked or stolen. Make sure you obtain a written disclosure of these charges well before you actually make your decision. The early termination payoff is the total amount you would need to repay if you end the lease agreement early; it includes both the early termination charge and the unpaid lease balance. In its early years, your lease may be financially upside down, which means that you owe more on the vehicle than it is worth.
Do Not Lease Just to Drive a Better Vehicle
Leases work best for people who wish to drive a new vehicle every two or three years and, thus, have decided that they will always have a car payment. If you do choose a leasing option, your goal should be to lower your monthly cost rather than to “buy more car.” Otherwise, in just a few years, you will find that you have spent big bucks for a vehicle you must turn back in or have to pay extra to buy as a used vehicle.
Be Cautious About Leasing Getting a good deal on a leased vehicle can be very complicated. Therefore, be cautious if you talk about buying the vehicle all through the negotiation process only to be offered a lease at the last minute. The seller might realize that the purchase price is too high for you and can get you into the same vehicle for a lower monthly payment. But you may be tempted to sign a deal that actually costs considerably more. In addition, make sure all oral agreements related to trade-in value, mileage charges, and rebates are included in the lease contract.
Avoid Balloon Loans One option for people considering leasing versus buying is a balloon automobile loan. You can arrange this type of financing through your bank or credit union. With a balloon automobile loan , you actually buy the vehicle with the last monthly payment equaling the projected residual value of the vehicle at the end of the loan period. This arrangement effectively lowers all the other earlier monthly payments to make them more competitive with lease payments. When the final balloon payment is due, perhaps one to several thousand dollars, the borrower generally has three options:
balloon automobile loan A loan that has a low monthly payment similar in amount to that required if the vehicle had been leased and with a large final payment similar in amount to the residual value under a lease.
1. Sell the car and pay the balloon payment with the proceeds (with luck, the vehicle will sell for a high enough amount).
2. Pay the balloon payment and keep the vehicle.
3. Return the vehicle to the lender to cover the balloon payment.
It Is Possible to Get out of a Lease Early
People eager to get out of a lease might consider a lease-swapping website such as leasetrader.com and swapalease.com. These companies try to match people who want to get out of a lease early with those who want to assume a short-term lease. They charge fees to post your vehicle's information, and your original leasing company likely charges a transfer fee.
Be Cautious About “Gap” Insurance New cars and low-mileage used cars depreciate (go down in value) very quickly after purchase, often as much as 25 percent after leaving the dealer's lot. If you take out a vehicle loan with a low down payment, it is possible that the value of the vehicle will go down faster than the amount owed. As a result, you can owe more on the vehicle than it is worth. This situation is referred to as being upside down and can easily last for up to two years following the initial purchase.
Being upside down can be a big problem when a newer vehicle is totaled in an accident. In such cases, the insurance company will reimburse for the value of the vehicle, not the amount owed on the loan. Car dealers sell gap insurance that pays off the remainder of the loan if the insurance payment is insufficient to do so. While gap insurance is attractive, it is very profitable for the dealer and not such a good deal for the buyer. You should consider the possibility of being upside down as a sign that you are not making a large enough down payment or that you are buying a vehicle that is too expensive for you.
Warranties are an important consideration in comparison shopping. Almost all products have warranties —assurances by sellers that goods are as promised and that certain steps will be taken to rectify problems—even if only in the form of implied warranties. The longer the warranty is and the more it covers, the better the warranty.
warranty Sellers' assurances that goods are as promised and that certain steps will be taken to rectify problems if they arise.
Implied and Express Warranties Under an implied warranty, the product sold is warranted to be suitable for sale (a warranty of merchantability) and to work effectively (a warranty of fitness) whether or not a written warranty exists. Implied warranties are required by state law. The only way to avoid them is if the seller states in writing that the product is sold as is . If you buy any product as is, you have no legal recourse if it fails to perform, even if the salesperson made verbal promises to take care of any problems. Used cars are often sold as is.
as is Way for the seller to get around legal requirements for warranties; the buyer takes all risk of nonperformance or other problems despite any salesperson's verbal assurances.
Written and oral warranties are called express warranties. Companies that offer written express warranties must do so under the provisions of the federal Magnuson-Moss Warranty Act if the product is sold for more than $15. This law provides that any written warranty offered must be classified as either a full warranty or a limited warranty.
Full and Limited Warranties A full warranty includes three stringent requirements:
full warranty Warranty that meets three stringent promises: the product must be fixed at no cost to the buyer within a reasonable time, the owner will not have to undertake an unreasonable task to return the product for repair, and a defective product will be replaced with a new one or the buyer's money will be returned if the product cannot be fixed.
1. A product must be fixed at no cost to the buyer within a reasonable time after the owner has complained.
2. The owner will not have to undertake an unreasonable task to return the product for repair (such as ship back a refrigerator).
3. A defective product will be replaced with a new one or the buyer's money will be returned if the product cannot be fixed after a reasonable number of attempts.
A limited warranty offers less protection than a full warranty. For example, it may offer only free parts, not labor. Note that one part of a product could be covered by a full warranty (perhaps the engine on a lawnmower) and the rest of the unit by a limited warranty. Read all warranties carefully, and note that both full and limited warranties are valid for only a specified time period.
limited warranty Any warranty that offers less protection than the three conditions for full warranty.
8.2d Extended Warranties (Service Contracts) Are Overpriced
An extended warranty (or service contract ) is an agreement between the contract seller (the dealer, manufacturer, or an independent company) and the buyer of a product to provide repair or replacement for covered components of the product for some specified time period. Extended warranties are sometimes given names such as maintenance agreement or buyer protection plan . These service contracts are purchased separately from the product itself (such as a vehicle, appliance, or electronics equipment). The cost is paid either in a lump sum or in monthly payments.
extended warranty/service contract/maintenance agreement/buyer protection plan Agreement between the seller and buyer of a product to repair or replace covered product components for some specified time period; purchased separately from the product itself.
Extended warranties are not insurance but act similarly. For example, a 42-inch LCD/LED flat panel high-definition television could have an extended warranty that promises to fix anything that goes wrong during the third and fourth years of ownership; the manufacturer's warranty covers the first two years. This contract might cost $120 for each year, or $10 per month.
Although buying an extended warranty might provide peace of mind, it is unwise financially because it makes no economic sense to insure against risks that can, if necessary, be paid for out of current income or savings. Plus extended warranties are horribly overpriced. More than 80 percent of all service contracts are never used, and total payouts to consumers to make repairs amount to less than 10 percent of all money spent on the contracts. More than half the profits of some electronics dealers come from extended warranty sales, not the products themselves.
Extended warranties are not a good choice when buying electronics because the products rarely have problems beyond the warranty period. Products that do seem to break down frequently are cell phones, laptops, treadmills, and elliptical trainers. These contracts are prevalent in the vehicle, appliance, and electronics markets because of the high profits involved and the persuasiveness of salespeople, who typically earn an extra high commission on the sale of an extended warranty.
Automobile manufacturers and dealers offer extended warranties as do a number of independent companies that offer service contracts for new vehicles. A deductible of about $100 usually must be paid with each use of the contract. Repairs are usually covered and may include preventive maintenance for certain covered components. The cost for an extended warranty averages $1800, and $800 of that is dealer profit, with $250 going to the salesperson. Sellers can afford to be more generous on a deal if they know that most of the money will be made back on the service contract. About one-third of people buy an extended warranty on their new vehicles, and three-fourths of those who haggled over price received a discount from the quoted price.
CONCEPT CHECK 8.2
1. What is the goal of comparison shopping?
2. Explain why lease payments for a new vehicle are lower than loan payments for the same vehicle.
3. Describe the relationships among capital cost, capital cost reductions, and residual value in a lease.
4. Explain the difference between an implied warranty and an express warranty. How do they relate to the term as is?
5. What is an extended warranty? What is a disadvantage of such a contract?
Tips for Buying Online
People use the Internet to shop for appliances, vehicles, furniture, and other big-ticket items. Here's how you can become a better online shopper:
1. Use only secure sites. A secure site will feature a key or lock symbol on its screens or have a URL starting with “https” (“s” for secure). Sites displaying the VeriSign symbol must meet certain security standards.
2. Only do business with sellers for which you have complete contact information, including a “snail mail” (postal) address and telephone number. To avoid bogus websites, verify any bargain website deal at the company's headquarters.
3. Review shipping policies and costs as well as return policies before placing your order.
4. Do not use your regular e-mail address. Set up a separate address at Yahoo!, Gmail, or other provider and use it solely for online transactions. This will reduce the spam coming into your everyday e-mail account.
5. Never use a debit card for online purchasing. When the debit card transaction is executed, your cash is immediately transferred from your account to the seller's account. Using a credit card allows you to request a chargeback (see Chapter 7 ) from the credit card company if there is a problem with the product.
6. Use only one particular credit card for online purchases. This practice will serve you well if your account number is stolen. In such a case, you can notify the one credit card issuer of the theft and block the card's future use without affecting your other accounts.
7. Print and keep copies of all purchase documents, warranties, credit card authorizations, and shipping notices.
8. Check the site's privacy policy. Sites that display the TRUSTe symbol or Better Business Bureau Online seal have agreed to meet certain privacy standards.
9. Opt out of any list sharing that the seller might conduct with other merchants.
Brenda J. Cude
University of Georgia
LEARNING OBJECTIVE 3
Negotiate and decide effectively when making major purchases.
Negotiating and decision making follow comparison shopping in the buying process. If you move through these steps too quickly, you may pay too much even when you have done a great job with your preshopping research and comparison shopping. Sellers of such products sell every day, and they are highly skilled; in contrast, consumers are amateurs when it comes to buying big-ticket items. Smart shoppers learn to negotiate.
Bias Toward Overconfidence
People engaged in understanding vehicle and major purchases have a bias toward certain behaviors that can be harmful, such as a tendency toward overconfidence. When negotiating the purchase of a major item like a vehicle people will assume they have sufficient information and skills to obtain the best buy. What to do? Arm yourself with tons of information about the price, interest rate, trade-in value, and dealer holdbacks before negotiating. And, remember that salespeople are professionals at selling and you are a relative amateur at buying.
8.3a Successful Negotiators Are Armed with Information
Negotiating (or haggling ) is the process of discussing the actual terms of an agreement with a seller. Consumers skip this step when making day-to-day purchases because prices in most stores are firm. With high-priced items—especially appliances, furniture, fine jewelry, and vehicles—there is an opportunity, and often an expectation, that offers and counteroffers will be made before arriving at the final price.
negotiating/haggling Process of discussing actual terms of agreement with a seller, usually on higher-priced items.
Negotiating is challenging for consumers when buying vehicles because many variables must be considered, including the price of the vehicle, the trade-in value (if any), the possibility of a rebate, the prices of options, the interest rate, and possibly a service contract. The dealer can appear to be cooperative on one aspect and make up the difference elsewhere. The key to successful negotiation is to be armed with accurate information on all variables, especially the price, interest rate, trade-in value, and dealer holdbacks.
Discover the Dealer Holdback Consumers have caught on to the fiction of new-car prices and now focus on the dealer invoice price, which reflects the price the dealer has been billed from the manufacturer. But this may not be the price the dealer truly will have to pay when the vehicle is sold. This occurs because manufacturers often offer a dealer holdback (or dealer rebate ) to dealers. A dealer holdback is a percentage of the total MSRP that the manufacturer holds and then gives back to the dealer, often at the end of the year or quarter. Potential buyers often do not know about holdbacks. Here the dealer can hold back a sum of money from (instead of paying to) the manufacturer, thereby providing the dealer with additional profit on the vehicle.
dealer holdback/dealer rebate A percentage of the total MSRP that the manufacturer holds and then gives back to the dealer, often at the end of the year or quarter.
Always obtain a firm price for a vehicle before negotiating financing or a trade-in.
Because of holdback incentives, dealers can sell a vehicle at or below dealer invoice price and still make a good profit. For example, a vehicle might have a sticker price of $27,890, an invoice price of $24,600, and a dealer holdback of 5 percent, or $1230. A negotiated price of $24,500 will still net the dealer a profit of $1130 [$1230 − ($24,600 − $24,500)]. Remember both the MSRP and dealer invoice price are artificial numbers set by the manufacturer and dealer to allow lots of room to negotiate a profitable price to the seller. For this reason, do not hesitate to negotiate for a price that is below the dealer invoice price. Visit www.edmunds.com/car-incentives/ for a listing of current dealer incentive offers on various makes and models of vehicles.
Negotiate Your Price The complexity and uncertainty involved in negotiating the price of a new vehicle have inspired the development of special services to assist buyers. A new-vehicle buying service is an organization that arranges discount purchases for buyers of new cars who are referred to nearby participating automobile dealers that have agreed to charge specific discount prices. After you sign up, a local dealer will call you to offer a no-haggle price, which is often within 4 percent of the dealer invoice price. The buying service earns its income by collecting a finder's fee from the dealer. One of the most popular is online at www.TrueCar.com . Professional shoppers, in exchange for a fee (perhaps $150 to $450) based on the dealer invoice price, will find the best available price from a nearby dealer and finalize the sale. Alternatively, for a lower fee, they will obtain price quotes so you can finalize the deal yourself. Two of the most popular buying services are CarBargains.com and Authority Auto ( www.authorityauto.com ). Also see car buying programs at Costco, Edmunds, and TrueCar.
new-vehicle buying service Organization that arranges discount purchases for new-car buyers who are referred to nearby participating automobile dealers that have agreed to charge specific discount prices.
Money Websites for Vehicles and Other Major Purchases
Informative websites for vehicles and other major purchases, including tips on buying safe vehicles are:
AutoTrader ( www.autotrader.com )
CarGurus ( www.cargurus.com )
CarFax ( www.carfax.com )
CarsDirect ( www.carsdirect.com )
Consumer Reports ( www.consumerreports.org )
Edmunds ( www.edmunds.com )
Insurance Institute for Highway Safety ( www.iihs.org )
Kelly Blue Book ( www.kbb.com )
Kiplinger's Personal Finance ( kiplinger.com/fronts/channels/cars/ )
MSN ( home.autos.msn.com/ )
MoneyCNN.com ( money.cnn.com/pf/savvy_spending/?iid=PF_Sub )
National Highway Traffic Safety Administration ( www.SaferCar.gov )
When negotiating a vehicle purchase, the key is to obtain a firm price from a dealer for the vehicle and optional equipment desired before discussing any other aspects of the deal. Rule number one in auto buying: Do not mention financing or a trade-in until you have pinned the salesperson down to a price! You will know from your preshopping research and comparison shopping what a good price for the vehicle in question would be.
Start your bargaining from this low price rather than the asking price or dealer invoice price on the vehicle. Obtain prices from three or more dealers and then let each know that you have done so and whether or not their price is low compared with the others. The dealer will then have the chance to reduce the asking price to meet the competition. This smart strategy pressures the dealer to meet your needs rather than the other way around.
Negotiate Your Interest Rate Negotiating the interest rate, or APR, on a vehicle loan is not only possible but also essential to getting a good deal overall. Most vehicle borrowers accept that the dealer-arranged financing is the best they can find. However, buyers may not know that the dealer benefits from having the borrower agree to pay a higher interest rate.
Here is how the process works. The dealer asks the buyer to complete a simple loan application. The application is submitted to one or more lenders with whom the dealer has a pre-existing affiliation. The lenders will assess the application and, if approved, suggest an APR. However, if the dealer suggests and gets an acceptance for a higher rate by the buyer (perhaps by telling the prospective buyer that his or her credit score is low), the dealer (and salesperson) receives a higher fee for arranging the higher APR loan. In this way, the dealer can make money even if the profit off the sale of the vehicle itself is minimal. This is why it is so important to have a good credit history, know your credit score, and arrange the best financing you can on your own and accept the dealer financing only if it can beat your deal.
Hard-Sell Stuff Your Car Does Not Need
Many new car dealers increase your final cost and their profits by offering a lot of last-minute options, sometimes even without the customer's approval. Options you may not need include underside rust protection, cloth seat fabric guard, onboard navigation system, Bluetooth technology, exterior paint sealant, upgraded stereo system, satellite reception, rear-seat video, CD changer, alarms, exterior trim package, vehicle ID window etching, and an extended warranty. “Just say no” is good advice. Even if you want an option or two, resist the dealer's high-pressure sales efforts because you can get a better deal through other sources.
Negotiate Your Trade-in Getting a good deal on a vehicle purchase typically requires one more negotiation—your trade-in. You can pay a low price for the car you are buying, arrange a low-rate loan, and still not have a good deal if you do not receive what your trade-in is worth. Success here depends on knowing the value of your vehicle as a trade-in based on your preshopping research. The same online sources you used to get that information also have information on the average price at which similar vehicles are selling via private individuals. While it is true that trade-in values are usually lower than private sale values, you also have the costs of selling and the time involved if you decide not to accept the dealer's offer for your vehicle.
Trade-ins are another way for a seller to make more money on the transaction. In one common sales technique, called high-balling , a dealer offers a trade-in allowance that is much higher than the vehicle is worth. This apparent generosity may look very good to a buyer. But beware; the dealer may be making up for this elsewhere, possibly in a higher-than-necessary price for the purchased vehicle. You will not know whether you are being high-balled unless you know the value of your trade-in.
high-balling Sales tactic in which a dealer offers a trade-in allowance that is much higher than the vehicle is worth.
Play “Good Cop-Bad Cop” When Buying a Vehicle Many people are uncomfortable negotiating with sellers. Sellers understand this and are very good at putting people at ease with friendly talk and a supportive tone. But underneath, they are all business. How should you play the game? If you are a good negotiator, bring a friend along to be the friendly good cop while you focus on the deal and ask the hard questions. If you dislike negotiating, you can be the good cop, while your friend can ask the hard questions and focus on getting a good deal.
8.3b Make the Decision at Home Using a Decision-Making Grid
It is unwise to make buying decisions for expensive purchases inside a retail store or showroom. By waiting until you get home to make the final decision, you are free of pressure from a salesperson and free of your own need to “get it over with.” After taking some time to rationally consider all of the consequences of the purchase, you can return to the dealer's showroom and close the sale.
A decision-making grid allows you to visually and mathematically weigh the decision you are about to make. Table 8-2 depicts a grid for someone deciding among three different washing machines. The first task in developing such a grid is to determine the various attributes for making the decision. In Table 8-2 , these factors include price, durability, and styling. Each attribute is assigned a weight that reflects the importance each has in the mind of the purchaser. Each alternative under consideration is then given a score (from 1 to 10 in this case) that indicates how well it performs on that attribute.
The rating (R) is multiplied by the weight (W) to obtain a weighted score. The total of the weighted scores for each alternative can then be compared with the totals for the other choices to determine which one “wins.” In Table 8-2 , Alternative C, which has a total score of 8.0, scores the best.
A grid of this type helps bring objectivity to your decision-making process and can be of benefit when buying big-ticket items. Also, you may consider other factors in your decision, such as seller reputation.
Table 8-2 Decision-Making Grid (Illustrated for a Washing Machine)
After negotiating a good deal and making your final decision, it would be nice if you could simply return to the dealer and sign the necessary papers. But even then there is opportunity for the dealer to push for a little more profit. One technique that is used at this point is called low-balling . This involves quoting and getting a verbal agreement from a buyer for an artificially low price. Then the salesperson attempts to raise the already negotiated price when it comes time to finalize the written contract. For example, after agreeing on the price of a vehicle with a buyer, the salesperson states that, as a formality, the approval of a manager is necessary. While the buyer is dreaming of driving home in the new car, the salesperson and the manager are talking about how much more they can get for the vehicle. When the salesperson returns, he or she indicates that there is a problem. Perhaps the trade-in value is too high, or the dealer invoice price can't be discounted by quite as much as planned, or the price of a certain option has increased. In reality, of course, low-balling is simply a ruse to allow the dealer to get more money. Smart buyers stand firm and insist on the deal that had been negotiated; otherwise, they walk out the door.
low-balling A sales tactic where the seller quotes an artificially low price to obtain a verbal agreement from a buyer and then attempts to raise the negotiated price when it comes time to finalize the written contract.
Finally, it is time to sign the papers. Commonly at this point the salesperson turns the buyer over to another member of the sales team whose specific job it is to have all the papers signed to finalize the sale, the loan, and the transfer of the title and registration of the vehicle. Sign only a buyer's order that names a specific vehicle and all charges, and do so only after the salesperson and sales manager have signed first. Then verify that all aspects of the deal are as originally agreed, sign your name, and drive away in your new vehicle.
buyer's order Written offer that names a specific vehicle and all charges; only sign such offers after the salesperson and sales manager have signed first.
Purchase Used Vehicles and Drive Them Forever
The best way to buy vehicles with the lowest overall cost is to buy late-model used vehicles and drive them for ten or more years or 200,000 miles or more. New cars lose about 25 percent of their value in the first year and 40 percent or more by the end of the second year. The average vehicle on the road today is over 11 years old so there are many from which to choose.
8.3d The So-Called Buyer's Remorse “Legal Right” Is False
Buyer's remorse is a myth pertaining to the buyer's supposed legal right to change his or her mind and return a vehicle after signing a purchase contract. This is a popular misconception—that consumers always have what is referred to as a three-day “cooling-off period,” or three days to decide whether the consumer wants to honor a signed vehicle purchase contract. It simply is not true.
buyer's remorse A myth pertaining to the buyer's supposed legal right to change his or her mind and return a vehicle after signing a purchase contract.
How to Buy a Used Vehicle
Most experts recommend purchasing late-model used vehicles to get the most from your vehicle-buying dollar. Following are some steps that can help you get a good vehicle for the money:
1. Budget automotive expenditure. Discuss your transportation budget with a spouse, significant other, or family member. Compare the cost for public transportation to that of vehicle ownership. Determine the amount you can afford for vehicle payments, insurance, fuel, and maintenance.
2. Value shop. Remain flexible concerning auto make, model, and options. The most practical and affordable vehicle may not contain every feature you desire. Write down the top five “must have” features you want, such as power locks and windows, air conditioning, aluminum wheels. And prioritize the list (see Figure 8-2 ). Consider all vehicles in a particular class regardless of manufacturer. Consider choosing an older model to obtain more of the features you value.
3. Search for reliable makes and models. The Internet is an excellent source of used-vehicle information. You also should examine the most recent April issue of Consumer Reports for its lists of recommended used vehicles in various price ranges, especially those with excellent repair records. Research Kelly Blue Book ( www.kbb.com ) and Edmunds ( www.edmunds.com/appraisal ) websites for pricing information. Obtain a vehicle history report, available from Carfax.com and other companies, which has odometer readings, accident reports, flood damage, total-loss information, ownership history. For example, a vehicle operated near salt water may have undercarriage corrosion. Also look at the federal government's online report for vehicles at www.vehiclehistory.gov/ .
4. Go shopping. New-car dealerships and private parties tend to offer the nicer, more reliable, and more expensive used vehicles. Dealerships often verify reliability of their vehicles and offer warranties. Used-car dealerships tend to have the worst quality. Private individuals deserve your attention because they usually own the vehicle and know its history. Used vehicles sold by rental agencies such as Hertz and Avis can be good choices because their vehicles have been regularly maintained.
5. Evaluate prior to purchase. Take along a friend who is knowledgeable about vehicles if you are not car savvy. Immediately rule out any vehicle that seems to have a problem or raises a question in your mind. Test drive all vehicles. Review the maintenance records when available and, if necessary, communicate with previous owners. Take final choice(s) to a trusted repair specialist for inspection. This investment of time and money may help you avoid purchasing a vehicle with problems and save many dollars in repair bills later.
6. Negotiate the details. The asking price is the beginning point for negotiation. Decide on your final price and stick to it. Begin by making your opening offer substantially lower than what you expect to pay. Then negotiate. Do not give in to the pressure to buy an extended warranty and other items. If appropriate, obtain a smog certification from the seller. Be certain that all spoken assurances are written into the sales contract. If necessary, walk away and go home to consider your alternatives and to make your final decision. It may be necessary to place a refundable deposit (and get it in writing) to hold the vehicle for a day or two while you make your decision.
7. Get insurance and a good title. Before driving your purchased vehicle, telephone your auto insurance company to add the vehicle to your policy. Be certain to obtain a good title to the vehicle before giving the seller your money.
Elizabeth Fletcher
Evangel University, Springfield, MO
The planned buying process is complete after you evaluate your decision. The purpose of this step is to think about where things went well and where they went less smoothly. The lessons learned will prove useful when you make a similar purchase in the future. Sometimes the buying process turns out to be so successful that you may want to compliment the seller.
Sean's Success Story
When shopping for a new car, Sean ran the numbers on leasing versus buying only to determine that he really could not afford the kind of vehicle he truly wanted. Therefore, he decided to buy a used car. He found a nice two-year-old Ford with only 21,000 miles on the odometer and bargained the price down to $19,000; thus, he avoided two years of heavy depreciation. Sean searched online for financing deals and then discovered an excellent rate at a nearby credit union. He paid the $5 credit union membership fee and deposited $5 to open an account, and they gave him a loan over 36 months. Sean considered buying an extended warranty but decided it would be too expensive. He has had the car for over two years now, and it has proved to be a reliable vehicle.
CONCEPT CHECK 8.3
1. List some of the complexities in vehicle buying, and offer your advice on how to get a best buy.
2. What three aspects of a vehicle purchase should be negotiated? In what order?
3. Why should you make major purchase decisions at home?
4. Summarize how to use a decision-making grid.
LEARNING OBJECTIVE 4
Use effective complaint procedures.
8.4 UTILIZE EFFECTIVE COMPLAINT PROCEDURES
Despite your efforts to make good consumer buying decisions, not all purchases turn out as well as you want. You may want to try to return goods, get out of a contract, file a complaint, or seek to right a wrong using an alternative dispute resolution program or using small claims court.
8.4a Use the Cooling-Off Rule to Cancel a Contract
If you buy something at a store and later change your mind, you may or may not be able to return the merchandise. However, if you buy an item in your home or at a location that is not the seller's permanent place of business, you may have that option. The Federal Trade Commission's (FTC's) cooling-off rule gives you three days to cancel a contract of $25 or more after signing it for a sale made anywhere other than a seller's normal place of business. The right to cancel for a full refund extends until midnight of the third business day after the sale.
cooling-off rule A Federal Trade Commission rule that gives consumers three days to cancel a contract of $25 or more after signing it for a sale made anywhere other than a seller's normal place of business.
Your Worst Financial Blunders in Vehicle and Other Major Purchases
Based on others' financial woes, you will make mistakes in personal finance when you:
1. Tell a seller what you can afford to pay.
2. Rely solely upon the seller for information on price, financing terms, or trade-in value.
3. Fail to complain when products fail to perform as expected.
The FTC's cooling-off rule applies to sales at the buyer's home, workplace, or dormitory, or at facilities rented by the seller on a temporary or short-term basis, such as hotel or motel rooms, convention centers, fairgrounds, and restaurants. The rule applies even when you invite the salesperson to make a presentation in your home. The cooling-off rule does not apply to sales made entirely by mail or telephone, sales that are needed to meet an emergency, or to real estate, insurance, or securities.
Under the FTC rule, the salesperson must tell you about your cancellation rights at the time of sale. In addition, the salesperson also must give you two copies of a cancellation form (one to keep and one to send) and a copy of your contract or receipt. The contract or receipt should be dated, show the name and address of the seller, and explain your right to cancel. The contract or receipt must be in the same language that is used in the sales presentation.
Turn Bad Habits into Good Ones
Do You Do This?
Buy on impulse Buy too much stuff
Get persuaded by ads to “buy now and save”
Ignore interest rates when financing a purchase
Pay too much for vehicle purchases
Can't decide on leasing a vehicle or not Buy overpriced extended warranties
Do This Instead!
Create and stick to a shopping list
Write down your needs versus your wants
Realize you are still spending money
Shop for the best financing terms
Learn to comparison shop and get rebates
Run the numbers on financing versus leasing
Avoid buying such unneeded products
The best way to avoid problems is to read the contract carefully and to fully inspect a new or used product or service before taking ownership. Various states have cooling-off rules that apply even longer cancellation periods to specific types of sales, such as dancing lessons, buying clubs, and timeshares.
Sometimes you may want to complain about the product or service so as to obtain redress —that is, to right the wrong. This process should start with the actual seller, as indicated in Table 8-3 . Seeking redress through the first three channels in the complaint procedures as shown in the table can rectify almost all consumer complaints.
redress Process of righting a wrong.
8.4b Mediation and Arbitration
Alternative dispute resolution programs are industry- or government-sponsored programs that provide an avenue to resolve disputes outside the formal court system. Vehicle manufacturers utilize these programs as part of their warranty procedures. Mediation is a procedure in which a neutral third party works with the parties involved in the dispute to arrive at a mutually agreeable solution. In arbitration, a neutral third party hears (or reads) the claims made and the positions taken by the parties to the dispute and then issues a ruling that may or may not be binding on one or both parties.
alternative dispute resolution programs Industry- or government-sponsored programs that provide an avenue to resolve disputes outside the formal court system.
DO IT IN CLASS
Table 8-3 Complaint Procedure (Levels and Channels of Complaining)
|
Levels to Bring Your Complaint |
Channels for Complaint |
|
1. Local business |
Salesperson → supervisor → manager/owner |
|
2. Manufacturer |
Consumer affairs department → president/chief executive officer |
|
3. Self-regulatory organizations |
Better Business Bureau → trade associations → mediation/arbitration panels |
|
4. Consumer action agencies |
Private consumer action groups → media action lines → government agencies |
|
5. Small-claims or civil court |
Small-claims court → civil court |
8.4c Lemon Laws and Small-Claims Courts
All states have new-vehicle lemon laws that provide guidelines for arbitrators to use to order a dealer's buyback of a “lemon.” A common definition of a lemon in these laws is a vehicle that was in the shop for repairs four times for the same problem in the first year after purchase. (For the specific definition in your state, visit www.carlemon.com .) To enforce a lemon law, the buyer must go through the warranty process specified in the owner's manual. Eventually, if the problem is not resolved, an arbitration hearing will be held through which the owner can request a buyback. Some states have also enacted used-vehicle lemon laws.
lemon laws State laws that provide guidelines for arbitrators to use to order a dealer's buyback of a “lemon” as defined under the law—commonly a car that has been in the shop four or more times to fix the same problem.
Sometimes your best efforts at redress may not prove successful. As a result, you might consider taking legal action in small-claims court. In this state court, civil matters are often resolved without the assistance of attorneys (in some states, attorneys are actually prohibited from representing clients in small-claims courts). Small-claims courts usually place restrictions on the maximum amount under dispute, typically ranging from $500 to $5000, for which a claim may be made in those courts. To file a small-claims court action, contact your local county courthouse and ask which court hears small claims or check it out on-line.
DO IT NOW!
You know more about personal finance after reading this chapter, so get started right now by:
1. Setting up a filing system for the warranty information and receipts for all products you own that have a warranty.
2. Decide on a big-ticket item you would like to own in the near future and create a decision-making worksheet for it similar to Table 8-2 , using your criteria and weights.
3. Keep a monthly budget and fit all payments for big-ticket items into your budget before making any purchase decision.
CONCEPT CHECK 8.4
1. Outline the steps to go through to seek redress.
2. Summarize the FTC's cooling-off rule to cancel a contract.
3. Distinguish between mediation and arbitration.
4. How do lemon laws work?
WHAT DO YOU RECOMMEND NOW?
N\s, what do you recommend to David and Lisa Cosgrove regarding:
1. How to search for two vehicles to replace those destroyed?
2. Whether to replace Lisa's vehicle with a new or used vehicle?
3. Whether to lease or buy a vehicle?
4. How to decide between a rebate and a special low APR financing opportunity if they decide to purchase a new vehicle for Lisa?
5. How to negotiate with the sellers of the vehicles?
BIG PICTURE SUMMARY OF LEARNING OBJECTIVES
LO1 Explain the first three steps in the planned buying process that occur prior to interacting with sellers.
The planned buying process includes three steps that occur prior to interacting with sellers: prioritizing wants, obtaining information during preshopping research, and fitting the planned purchase into the budget. These steps represent the homework needed when preparing to buy.
LO2 Describe the process of comparison shopping.
To interact effectively with sellers, you should comparison shop to find the best buy. When purchasing vehicles and other big-ticket items, this shopping process includes comparing prices, financing arrangements, leasing options, warranties, and extended warranties.
LO3 Negotiate and decide effectively when making major purchases.
Negotiating with sellers involves obtaining a fair price, low-cost financing, and a high trade-in allowance. After negotiating, the final decision should be made at home.
LO4 Use effective complaint procedures.
When the buying process has not gone well, you can use a variety of effective complaint procedures including the FTC's cooling-off rule, mediation, arbitration, lemon laws, or a small-claims court to try to resolve the situation.
LET'S TALK ABOUT IT
1. Steps in the Planned Buying Process. Do you think all of the steps in the planned buying process are used when buying simple everyday products (such as a loaf of bread or a half-gallon of milk), or are they used only when buying big-ticket items? Why, or why not?
2. Positives and Negatives of Leasing. What benefits do you see in leasing a vehicle? What negatives exist when leasing?
3. A Bad Purchase Decision. What is the worst purchase decision you have ever made? What step(s) in the planned buying process could you have done better in that situation?
4. Do You Complain? When was the last time you were seriously dissatisfied with a purchase? Did you complain? Why or why not? If you complained, what was the outcome?
DO THE MATH
1. Future Value on Cost of Extended Warranty. Allison Jones of Jonesboro, Arkansas, is considering paying $150 a year for an extended warranty on several of her major appliances. If the appliances are expected to last for five years and she can earn 2 percent on her savings, what would be the future value of the amount she will pay for the extended warranty?
2. Value of Shopping Carefully. James Canter of Dallas, Texas, is a good shopper. He always comparison shops and uses coupons every week. James figures he saves at least $40 a month as a result. Assuming an interest rate of 2 percent, what is the future value of this amount over ten years?
3. Buy Versus Lease. Amanda Forsythe of Tampa, Florida, must decide whether to buy or lease a car she has selected. She has negotiated a purchase price of $24,700 and could borrow the money to buy from her credit union by putting $3000 down and paying $515 per month for 48 months at 6.5 percent APR. Alternatively, she could lease the car for 48 months at $310 per month by paying a $3000 capital cost reduction and a $350 disposition fee on the car, which is projected to have a residual value of $8100 at the end of the lease. Use the Run the Numbers worksheet on page 232 to advise Amanda about whether she should buy or lease the car.
DO IT IN CLASS PAGE 232
4. Rebate Versus Low Interest Rate. Kyle Parker of Fayetteville, Arkansas, has been shopping for a new car for several weeks. So far, he has negotiated a price of $27,000 on a model that carries a choice of a $2500 rebate or dealer financing at 2 percent APR. The dealer loan would require a $1000 down payment and a monthly payment of $564 for 48 months. Kyle has also arranged for a loan from his bank with a 7 percent APR. Use the Run the Numbers worksheet on page 231 to advise Kyle about whether he should use the dealer financing or take the rebate and use the financing from the bank.
DO IT IN CLASS PAGE 231
FINANCIAL PLANNING CASES
CASE 1
The Johnsons Decide to Buy a Car
After three years of riding a bus to work, Belinda finds that she can no longer do so because her employer moved to a location that is not convenient for public transportation. Thus the Johnsons are in the market for another car. Harry and Belinda estimate that they could afford to spend about $10,000 on a good used car by making a down payment of $2000 and financing the remainder over 24 months at $355 per month.
(a) Make suggestions about how the $355 might be integrated into the Johnsons' budget ( Table 3-6 on page 87) by making reductions in certain expense categories.
(b) If they cannot make room in their budget for a $355 monthly car payment, would you recommend they finance a vehicle for 36 or 48 months? Why or why not?
(c) Which sources of used cars should they consider? Why?
(d) Assume that the Johnsons have narrowed their choices to two cars. The first car is a five-year-old Chevrolet Malibu with 77,000 miles; it is being sold for $10,000 by a private individual. The seller has kept records of all maintenance and repairs. The second car is a five-year-old Ford Fusion with 70,000 miles, being sold by a used-car dealership. Harry contacted the previous owner and found that the car was given in trade on another car about three months ago. The previous owner cited no major mechanical problems but simply wanted a bigger car. The dealer is offering a written 30-day warranty on parts only. The asking price is $10,400. Which used car would you advise the Johnsons to buy? Why?
(e) Would you recommend that they purchase or lease a low-priced new vehicle instead of buying a used vehicle? Why or why not?
CASE 2
Victor and Maria Hernandez Buy a Third Car
The Hernandezes' older son, Jacob, has reached the age at which it is time to consider purchasing a car for him. Victor and Maria have decided to give Maria's old car to Jacob and buy a later-model used car for Maria.
(a) What sources can Victor and Maria use to access price and reliability information on various makes and models of used cars?
(b) What sources of used cars might be available to Victor and Maria, and what differences might exist among them?
(c) How might Victor and Maria check out the cars in which they are most interested?
(d) What strategies might Victor and Maria employ when they negotiate the price for the car they select?
CASE 3
Julia Price Wants to Drive a BMW
It has been almost 15 years since Julia graduated with a major in aeronautical engineering, and now she makes “buckets of money” working as a project manager for a large defense contracting company. While she is not very thrifty, she does like a good deal, especially on expensive purchases. Julia recently compared new models of the BMW 4-Series, Jaguar F-type, Audi A7, and Infiniti Q50. She checked out reviews in Consumer Reports and other magazines and test drove each vehicle. After deciding on the BMW, Julia shopped online for dealers beyond her community. Julia thinks that she will save about $3800 if she buys her car and an extended warranty on it from a dealer located 40 miles from her home instead of her hometown seller. She is not sure whether she should take advantage of the dealer's 3 percent financing versus a $4000 rebate, take the rebate and get a 6 percent loan from a nearby credit union, or lease the vehicle. Offer your opinions about her thinking.
CASE 4
Purchase of a New Refrigerator
Gary Joseph, a financial consultant from Spokane, Washington, is remodeling his kitchen. Gary, who lives alone, has decided to replace his refrigerator with a new model that offers more conveniences. He has narrowed his choices to two models. The first is a basic 16-cubic-foot model with a bottom freezer for $799. The second is a 25.4-cubic-foot model with side freezer for $999. Additional features for this model include icemaker, textured enamel surface, and ice and water dispenser. Gary's credit union will lend him the necessary funds for one year at a 12 percent APR on the installment plan. Following is his budget, which includes $2140 in monthly take-home pay.
DO IT IN CLASS PAGE 227
|
Food |
$ 300 |
|
Entertainment |
120 |
|
Clothing |
60 |
|
Gifts |
70 |
|
Charities |
75 |
|
Car payment |
330 |
|
Personal care |
60 |
|
Automobile expenses |
120 |
|
Savings |
130 |
|
Housing |
825 |
|
Miscellaneous |
50 |
|
Total |
$2,140 |
(a) What preshopping research might Gary do to select the best brand of refrigerator?
(b) Using the information in Table 7-1 on page 213 or the Garman/Forgue companion website, determine Gary's monthly payment for the two models.
(c) Fit each of the two monthly payments into Gary's budget.
(d) Advise Gary to help him make his decision.
CASE 5
A Dispute over New-Car Repairs
Christopher Hardison, a high school football coach from Oklahoma City, Oklahoma, purchased a new SUV for $28,000. He used the vehicle often; in fact, in less than nine months, he had put 14,000 miles on it. A 24,000-mile, two-year warranty was still in effect for the power-train equipment, although Christopher had to pay the first $100 of each repair cost. After 16,500 miles and in month 11 of driving, the car experienced some severe problems with the transmission. Christopher took the vehicle to the dealer for repairs. A week later he picked the car up, but some transmission problems remained. When Christopher took the car back to the dealer, the dealer said that no further problems could be identified. Christopher was sure that the problem was still there, and he was amazed that the dealer would not correct it. The dealer told him he would take no other action.
DO IT IN CLASS PAGE 242
(a) Was Christopher within his rights to take the car back for repairs? Explain why or why not.
(b) What logical steps might Christopher follow if he continues to be dissatisfied with the dealer's unwillingness or inability to repair the car?
(c) Should Christopher seek any help from the court system? If so, describe what he could do without spending money on attorney's fees.
BE YOUR OWN PERSONAL FINANCIAL MANAGER
1. Can You Afford a Vehicle Payment? Review Table 8-1 , “Fitting a Vehicle Payment into a Monthly Budget,” and reflecting upon your own likely financial situation following graduation, write down a few notes explaining how following such an approach might be appropriate for you.
2. Priority Worksheet. Review Figure 8-2 , “Priority Worksheet (for Haley Wilson),” on page 225 to help you think through the options that you desire in a new vehicle. Tentatively decide on the top five options you would prefer on a new vehicle and write up your findings or complete Worksheet 31: My Top Priority Motor Vehicle Features from “My Personal Financial Planner” to establish your priorities.
3. Comparing Vehicle Purchase Contracts. To avoid simply focusing on one or two aspects of buying a vehicle, such as the monthly payment or the trade-in value, complete Worksheet 32: Comparing Vehicle Purchase Contracts from “My Personal Financial Planner” to help you focus on effectively comparing what is most important to you.
4. Lease or Buy a Vehicle? Review the Run the Numbers worksheet, “Comparing Automobile Financing and Leasing,” on page 232 to help to decide which choice is better for you or complete Worksheet 33: Should I Lease or Buy a Vehicle? from “My Personal Financial Planner.”
5. Rebate or Low-Rate Financing? Review the Run the Numbers worksheet, “Choosing Between Low- Interest-Rate Dealer Financing and a Rebate,” on page 231 to help to decide which alternative is better for you when you can arrange your own financing or complete Worksheet 34: Should I Take a New Vehicle Rebate or Low-Rate Financing Offer? from “My Personal Financial Planner.”
6. Major Purchase Decision-Making Grid. Review Table 8-2 , “Decision-Making Grid (Illustrated for a Washing Machine),” on page 239 and think about a purchase you might make. Then complete Worksheet 35: Decision-Making Worksheet for a Major Product Purchase from “My Personal Financial Planner” and insert the weighted scores you think appropriate.
7. Sample Complaint Letter. Review Table 8-3 , “Complaint Procedure (Levels and Channels of Complaining),” on page 242 to draft a letter to seek redress for a deficient product or service you may have had in the past using Worksheet 36: Sample Product or Service Complaint Letter from “My Personal Financial Planner” as a guide.
ON THE NET
Go to the Web pages indicated to complete these exercises.
1. Keys to Vehicle Leasing. Visit the website of the Federal Reserve Board at www.federalreserve.gov/pubs/leasing/ where you will find a link titled “Keys to Vehicle Leasing” that expands on the information in this book. Use this information to generate a list of pros and cons of leasing versus purchasing a vehicle. By clicking on “sample leasing form” on this Web page, you can view and print a copy of the required vehicle leasing disclosure form.
2. Car Buying Advice. Visit the website of Consumer Reports magazine at www.consumerreports.org and click on the “Cars” tab and then see the “Car Buying Advice” section. There you will find lots of information on how to buy cars as well as reliability data. In what ways are the strategies similar and in what ways do they differ from the tips offered in this book for buying a used car?
3. Consumer Protection Organizations. Search Google for “consumer protection organizations” that assist consumers with complaints. Create a table showing your findings for three organizations, and include the name, telephone number, Web address, main purpose, and types of problems addressed for each.
4. Visit Edmunds.com. Go online to Edmunds.com and search the site carefully. Write a report of your findings.
5. Value of Used Cars. Visit the website for the Kelly Blue Book at www.kbb.com to determine the market price of three used cars that might be of interest to you. Determine their “used car retail value,” “trade-in value,” and “private party value.” Why do the three values differ?
ACTION INVOLVEMENT PROJECTS
1. Needs and Wants. Using Figure 8-2 on page 225 as a guide, make a list of the options in the first column that you would want if you could have any car you wanted. Realizing that getting all the options would be a dream (these are wants), go back to the list, move the priority level on certain items, and move the checkmarks to the second or third priorities. Your needs should now be in column one with wants in the other columns.
2. Price Available Vehicles. Telephone two new car dealers to determine if they have a particular make and model of vehicle that is of interest to you, for example, a two-year-old Toyota Prius. Inquire about number of vehicles available of the make and model of interest, colors, options of interest, and asking prices. Make a table of your findings.
3. Compare Financing Terms. Telephone two new car dealers to determine some financing details on used vehicles. Inform the dealers that your FICO credit score is above 750 and that you want to finance $12,000 after making a $4000 down payment. Find out the interest rate, number of years one could finance, and the monthly payments. Make a table of your findings.
Visit the Garman/Forgue companion website at www.cengagebrain.com .