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