Chapter 7

Transportation and Household
Purchase Decisions
Chapter 7
Planning Your Financial Future, 4e
by: Boone, Kurtz & Hearth
 25% of
a car
car buyers reported problems with buying
Dealer not straightforward with price negotiations
Sloppy prep of vehicle
Pressure from salespeople
 Purchase of
household goods also elicited
numerous complaints
Defective goods
Failure to honor warranties
Deceptive advertising
How Households Make
Purchase Decisions
 You decide you want (need) something, like a new
Can you afford it?
What type do you want (size, comfort, hide-a-bed, etc.)
Review what’s available
Do your research
 Is it available at numerous places—are the prices comparable?
 Is a financing plan available (and satisfactory)?
Figure 7.1: Steps in the Consumer
Decision-Making Process
Personal influences
•Previous experience
Environmental influences
•Family members
•Friends and acquaintances
•Sales representatives
Recognition of
problem or
Evaluation of
Purchase act
A Model of Consumer Decision
 How elaborate and formal the process is
depends on
What you’re going to buy
How important the purchase is
How often you make the purchase
How expensive the item is
 Major purchase decisions involve relatively
complex decision processes
Benefits of A Step-by-Step
 Everyone impulse buys, but it’s better to not
do this, because it is better to
Have control, make a conscious decision, be
 By following a step-by-step process you’ll probably
be able to extend the purchase power of limited
Take advantage of sales, etc.
Can pay for purchases in least expensive way
Avoid mistakes associated with impulse buying
Separating Needs from Wants
 Need – something thought to be a necessity
 Want – something you desire but it is unnecessary
Example: If all you need to do with a computer is surf
the Web and basic word processing, do you need a topof-the-line computer?
Wise consumers attempt to separate needs from wants
prior to shopping
 Decide how to fit the purchase into your budget
Table 7.1: Needs Versus Wants
Your Rights as a Consumer
 An informed consumer needs to know about fraud,
sources of consumer assistance, etc.
 Consumer fraud and abuse
Mail and telephone frauds
Home and auto repairs
 Pay for major repairs when only minor work needed
Deceptive advertising
Deceptive sales practices and pricing
 Place an item on sale to lure in shoppers, only to have the sale
item ‘sell out’ quickly
Your Rights as a Consumer
Identity theft
 Someone steals your personal information and uses it
to obtain credit cards, cash, or other loans
 Protect yourself by
Guarding ATM slips
Destroying all preapproved credit card solicitations
Regularly reviewing credit record
Sources of Consumer
 Consumer Action Handbook
 Better Business Bureaus (BBB)
File complaint
Seek info about business
Independently operated, not-for-profit organizations
Can only take action against a business that is a member
 Only about half of businesses belong to BBB
 Consumers Union
Publishes Consumer Reports magazine
Sources of Consumer
 Underwriters Labs (UL)
Largest independent, not-for-profit, safety-testing organization in
Investigates products for fire, electric shock, etc.
 Using the media
If you complain to the media, corporation may take action (fix the
problem) to avoid negative exposure
 Selected federal agencies
Federal Trade Commission, National Highway Safety
Administration, FDA, etc.
 Discussed in the Consumer Action Handbook
 State and local government consumer protection services
Regulate public utilities, health-care delivery, insurance practices,
How to Complain and Get
 Take the following steps
Determine the problem exactly and decide how you
want it resolved
 Do you want your money refunded or a replacement product?
 Have all the necessary documents on hand
Contact the person who sold you the item and tell them
the problem/proposed solution
 If they can’t help, talk with their supervisor
 Most complaints are resolved this way
If you are not satisfied, write the company
Taking Third-Party Action
 If
you’re still not satisfied with actions taken, you
can involve a third party
 If
Federal, state, or local consumer affairs or regulatory
Private consumer organizations
this doesn’t work, you can take the business to
Small-claims court – handles disputes involving small
amounts of money—$1,000 or less
The Transportation Decision
 About 11% of
our money is spent on
Including insurance, gasoline, and other driving
costs, maintenance, etc.
 It’s the second or third largest expense a
consumer will make
Do You Need a Car?
 Average new car costs $20,000
 Average American drives 13,500 miles per year
¾ of those miles commuting to/from work, grocery
store, etc.
In many cases, there are no other modes of
Over 90 percent of all workers commute by car
Many residents of large cities find a car unnecessary
 Congestion
 Parking
 Expensive
Do You Need a Car?
 The cost of
owning and operating an
Financing the purchase
Maintaining the vehicle
Car insurance
Registration fees
Figure 7.5: Breakdown of the Estimated FiveYear Ownership Cost of the Honda Accord
Source: Based on data from IntelliChoice,, accessed July 8, 2004.
How to Purchase an
 Choosing the right car for you
Make and model
 Reputation
Size and body style
 Distinguish between your needs and wants
Cost of ownership
How to Purchase an
 Choosing the right car for you
Desirable features include
 Low mileage
 Late model
 Quality reputation
Should also check
 Tire wear
 Condition of interior
 Rust spots
 Ripples in metal
A New or a Used Car?
With the average new car price around $20,000,
about 75% of car buyers are choosing used cars
About ½ of used car purchases occur through private
transactions (not through a dealer)
 Disadvantages include no financing through seller, no
warranty, buyer must handle the paperwork of
transferring ownership
Web Links
LOTS of different web sites to help you
determine a fair value for new and used
NADA Used Car Guide
 Published monthly by the National
Automobile Dealers Association
 Shows current retail and trade-in prices for
most domestic and foreign cars
 Includes value of specific options and
unusually low mileage
 Available at most credit unions, banks, and
some libraries and insurance agencies
Choosing a New-Car Dealer
and Closing the Sale
 Doing your homework
Go to the dealership with the knowledge of the
car’s invoice price so that you can compare that
to the sticker price
 Represents what the car cost the dealer
 Negotiate by working up from the invoice price, not
down from the sticker price
 Arrange for financing before shopping for a car
Negotiate With the Dealer
 You can always say ‘no’ and walk away
 What’s a good deal?
Paying $300-$500 above the invoice price is a very good deal (but
for popular models be prepared to pay more)
 Watch out for
Extended service warranties (rarely worth the cost)
Fees for preparing state-required paperwork (not really negotiable)
Dealer-added ‘paks’ (such as rust proofing, paint sealant, etc.) (rarely
worth the cost)
Credit life insurance (pays off the balance of the loan should you
 Very expensive, probably unnecessary
Tips for Negotiating with Car
 Remain calm and don’t become too attached to the car (be
prepared to walk away)
Don’t discuss trade-in value, etc. until you’ve arrived at a
firm price for new car
Bargain up from invoice price, not down from sticker price
Be prepared to shop around
Be prepared to wait while the salesperson checks with
DON’T write a check for a deposit even if dealer says it’s
Tips for Negotiating with Car
 Don’t answer questions like
How much can you afford to pay on a monthly basis?
 Don’t focus on the monthly payment, focus on the
price of the car—$1,000 spread out over 5 years
isn’t that much, but it’s still $1,000
 Read everything carefully before you sign
 Shop around for car financing—don’t let the
salesperson talk you into a lease
Buying is usually the better alternative
Alternatives to Negotiation
 Many consumers hate the negotiation process
 Alternatives
Use the Internet (
Some manufacturers (Saturn) have a strict, no-haggle pricing policy
Cost-plus basis
 Annual (or semiannual) car sales with credit union
 Sam’s Club
Have to arrange your own financing, may not be able to trade in
 Car buying service – for a fee, service will get the best price it can on
specific model
Have to arrange your own financing, may not be able to trade in
What About Trade-Ins?
 Determine the trade-in and retail value of
your old
car via the NADA Used Car Guide or online sources
before shopping for a new car
You’ll probably be offered the wholesale value—not the
retail value
 May be able to negotiate a better trade-in price if car is in good
condition and is less than four years old
 You’re probably better off, in terms of money, selling your old
car yourself
But have to contend with hassle and expense of advertising and
dealing with prospective buyers
 Fairly standard warranty is 36 months or 36,000
miles, whichever comes first
 Covers cost of repairing/replacing covered items
(parts and labor)
 ‘Bumper-to-bumper’ warranty covers everything
except the tires for certain time period
 ‘Power train warranty’ covers engine/transmission
for additional time period after the expiration of
the bumper-to-bumper warranty
 Some features (such as seatbelts have a lifetime
Financing the Car Purchase
 Decide how large a monthly payment you can
afford or want to pay
Rule of thumb: Car payment shouldn’t exceed about 20–
25% of your monthly take home pay
Just because you can afford a large payment doesn’t
mean you need that expensive of a car
Many people have begun financing cars over longer time
 Increases the amount of interest you’ll pay
Sources of Financing
 Banks and credit unions
Credit unions offer very competitive rates, low down
payments, payroll deduction plans
 Auto manufacturer’s financing subsidiary (such as
Convenient, have been offering more competitive rates
 A used car loan generally carries higher interest
rates, shorter terms, and higher down payment
Evaluating “Low-Rate”
Financing Incentives
 Auto manufacturer’s financing, subsidiary
offers rates below market rates to entice
buyers to finance with them
Is this your best alternative?
 Generally only for very short time frames (24 or 36
months)—you may not be able to afford the payment
 May offer either a cash rebate or a low-rate loan—
you may be better off taking the cash rebate and
arranging your own financing
The Leasing Alternative
 Leasing has become very popular with new-car
shoppers (about 25% of new cars are leased)
Is it worth it?
 Supporters argue
Little or no down payment
More car for the money
Lower monthly payments
 Opponents argue
 At the end of lease you don’t own the car
Typically less expensive to buy a car through financing rather
than leasing
Example: Should You Lease or
 You’ve negotiated a final price of
$20,000 on the cost of
financing a new-car purchase. If you buy the car you’ll pay
$4,000 on down payment and finance the rest at 7% for 36
months. [Your monthly payment will be $494 and you’ll
make a total of $17,785 in payments.] You think the car
will be worth about 70% of the purchase price after 3 years.
If you lease, you’ll pay a security deposit of $750 and make
monthly payments of $299 for 36 months (for a total of
$10,764). If you return the car at the end of the lease
period, you’ll pay a lease termination fee of $500. You can
earn 3% on your savings—what should you do?
Example: Should You Lease or
 If
you lease, you’ll make lower monthly
payments and a much lower up-front cost
Terminal Value of car: +$14,000
Total payments: –$17,784
Interest Lost: $360
4000 × 3% × 3 years
Lease termination fee: $0
Total Cost: –4,144
Terminal Value of car: $0
Total payments: –$10,764
Interest Lost: –$68
750 × 5% × 3 years
Lease termination fee: –$500
Total Cost: –11,332
Tips for Leasing
Negotiate the price as if you were buying the car (don’t tell the
salesperson you want to lease until after the price has been negotiated)
Ask what the rate is used to compute the lease payment—akin to the
APR on a loan
Ask about the residual value of the car
Ask about wear-and-tear charges at the end of the lease (read this very
Decide how many miles per year you intend to drive the car—many
companies charge a mileage rate if you exceed the mileage limit
Make sure the manufacturer’s warranty covers the entire lease term
(both years and mileage)