Presentation on theme: "Personal Finance: Another Perspective"— Presentation transcript:
1 Personal Finance: Another Perspective The Auto Decision:UnderstandingBuying versus LeasingUpdated 1/25/2012
2 Objectives Understand how a car fits into your financial plan Understand key issues of car ownershipC. Understand how to buy or lease a new vehicle and the lease versus buy decisionD. Understand how to buy a used car
3 A. How does a Car Fit Into your Financial Plan? Most important reasonsIt’s a means of transportationYou have saved for itIt is within your budgetLess important reasonsIt’s fun to driveIt’s fastIt makes a statement about your lifestyle (as if you care)
4 How can a Car Hurt your Goals? You borrow the moneyInstead of earning interest, you pay itIts not in your budgetIt takes the place of more important goalsIts more than you had plannedIt relegates more important goals to a lesser position
5 QuestionsDo you know how a car fits into your personal financial plans?
6 Understand Key Issues in Auto Decisions There are a number of important topics to understand before we discuss buying or leasing new or used vehicles. These include:1. Choosing a vehicleGoals and BudgetSafety ReportsAutomobile ReportsInsurance2. Before You Go LookingNew/Used Vehicle PricesHoldbackWarrantiesService ContractsLemon Laws3. After You Have Found ItVehicle HistoryChecked by a MechanicMaintenance records
7 Choosing a Vehicle: Your Goals and Your Budget Know your goals and your budgetHave you written down your goals?Are you living on a budget?If you are planning to finance the vehicle (not recommended), are there sufficient funds to cover the costs and still attain your other goalsAre you putting aside money each month to purchase another vehicle in the future
8 Choosing: Vehicle Ratings and Safety Pick a vehicle that is safe for your familyWhere do you find information on vehicle safety and ratings?There are a number of good sites. A good place to start is the National Highway Traffic Safety Administration site at safer cars at and the Insurance Institute for Highway Safety atYou get information on safety ratings, crash tests and other important information about specific vehicles
9 Choosing: Automobile Reports Pick a vehicle with a strong safety and repair recordWhere do you find safety and repair information?You can find good information at Consumer Reports on new and used vehicles atThere is a lot of great information at this source on vehicles and ratings
10 Choosing: InsurancePick a vehicle that is inexpensive to insure and driveWhich vehicles are more expensive to insure?The Insurance Services Office (ISO) rates each vehicle on its loss history, with a number between 3 and 27.The higher the number, the more expensive the coverageSports cars, high performance cars, and even SUV’s are more expensive to insureWhich vehicles are more expensive to drive?Check the miles per gallon in the city and highway
11 Before You Go Looking: New versus Used Decision Your choice of new versus used vehicles will depend on three areas: goals, preferences, and available budget for transportation expensesNew VehiclesAdvantagesNew vehicle and all that goes with itLower maintenance costsCar may last longer (it is not used)DisadvantagesHigher initial vehicle costsHigher insurance costsMay limit other goals if spend too much
12 Before You Go: New versus Used Decision (continued) Used VehiclesAdvantagesLower initial vehicle costsLower insurance costsMay provide additional resources for other goals due to lower costsDisadvantagesHigher maintenance costsWill likely have to replace it sooner than new car
13 Before You Go: New Vehicle Prices Know what the dealer paid for the vehicleWhere can you get reliable estimates for new vehicle prices?There are a number of automobile websites where you can get great estimates of what the dealer paid from the manufacturer, i.e., orPut in the manufacturer, model, and options and you can get the invoice priceNegotiations should begin at the invoice price
14 Before you Go: Used Vehicle Prices Know the price range for the used vehicle you are looking at (good to excellent condition)Where do you find information on used car prices?You can generally find the same information on used cars, just as you do new cars. Key sources include orKnow which guides are used in your area, i.e. Nada versus Kelly Blue Book
16 Before you Go: Holdback Know the dealer HoldbackWhat is a holdback?The holdback is a rebate to the dealer to compensate the dealer for holding the vehicle on his lot. Information on holdback is found at many different sources, including:Why is this important?It is important for you to realize that even when the dealer sells a vehicle at this cost, he is still making money
17 Before you Go: Warranties Know the warranty and periodWhat are warranties?Warranties are assurances that goods are as promised and that any problems will be resolvedWhat are full warranties?Full warranties are contracts that require:1. Product will be fixed at no cost to the buyer within a specified time2. Owner will not have to undertake unreasonable tasks to return the product3. Defective product will be replaced or money returned if it cannot be fixed
18 Before you Go: Service Contracts Know available service contracts and providersWhat are service contracts?Agreements between the contract seller (dealer, manufacturer, etc.) to provide free (or with a deductible) repair services to covered components specified length of time or mileage after the original warranties are over.What should you be concerned about?Contract terms: Items covered (power-train), length of coverage (i.e., 5 years), and mileage Contract seller: Who stands behind it. Generally service contracts from the manufacturer are better as you can get service nation-wide
19 Before you Go: Lemon Laws (Consumer Protection) Know your rights as a consumerWhat are lemon laws?Laws established to protect the consumer in case the vehicle purchased is a “lemon”How do you know if you have a lemon?You are still having problems, and you have made:4 attempts to fix the problem, andThe car was out of service at least 30 days during the first 12 months or 12,000 milesTake the car back and either get another car or your money back
20 After You Have Found It: Vehicle History Get a vehicle history reportWhat is a vehicle history report?It is a record of each and every time the vehicle was registered with a different owner in the records of the stateHow can you get a copy of a vehicle history?You can go to By putting in the Vehicle Identification Number (VIN), you can get a report as to the ownership and location of a vehicles history.
21 After You Have Found It: Checked by a good Mechanic Get the vehicle checked by a qualified mechanicHow do you get it checked?Take it to a qualified mechanic, preferably from a dealer for a major checkupWhile it may cost between $80-250, it will be worth it if they find problems
22 After You Have Found It: Service Records Review the service records of the vehicleHow do you check service records?Sellers should have a copy of all service performed on the vehicleConsumers should keep a record of all service performedDealers, oil change places, etc., often have records of when service was performedVehicles which have good service records were likely better taken care of than those without, and as such, command a higher premium
23 QuestionsAny questions on keys issues in buying or leasing new and used vehicles?
24 C. Understand how to Buy or Lease a Vehicle and the Lease/Buy Decision General Guidelines (the process):1. Know the terminology2. Narrow your choices and pick your vehicle3. Determine your total price and negotiate for it4. Finance the purchase if you must (lease or buy)5. Enjoy your purchase and keep it well maintained
25 1. Know the Terminology MSRP Manufacturers hoped for price Capitalized costYour agreed to or negotiated costCapitalized cost reductionAny reductions in cap. cost, such as rebates, down payment, dealer incentives, trade-in, etc.Net capitalized cost (also called adjusted capitalized cost)Capitalized cost less capitalized cost reductionResidual valueExpected value of the vehicle at term endLease termThe number of months the vehicle is leased
26 Leasing Terminology (continued) There are three parts to lease costs1. Usage (or depreciation)Usage is the amount of the value of the vehicle that is used over the lease life. It is calculated by taking the net cap cost less the residual value2. Interest (or finance costs)(Net capitalized cost + residual) * money factorIt is the average amount borrowed times the monthly interest rate: (Net cap. cost + residual) / 2 times average interest rates: APR / 123. Taxes (or government costs)Taxes are (Usage + Interest) * tax rate
27 Leasing Terminology (continued) What is the Money Factor?It is a way of expressing interest rates. It is the APR (in decimal form) divided by 24.It is a way of calculating your monthly interest costs, which is the average amount borrowed * average interest rateAverage amount borrowed: (Net capitalized cost + residual) / 2Average interest rate: APR / 12Multiplied together: (Net cap. cost + residual) * APR / 24 (which is your money factor) gives your monthly interest charge
28 2. Narrow Your Choices and Pick your Vehicle Comparison shop: price, product features, and quality.Be informed: check library and Web sources.Look at the alternativesFit your car into your budget—don’t make your budget fit your car!Calculate your payments if you must finance it.
29 Narrow and Pick (continued) Do your comparison shopping (via the internet or other publications)Compare priceCompare featuresCompare qualityDetermine what is available in your price range.Test-drive the exact vehicle you are considering.
30 3. Determine your Total Price and Negotiate for It (Capitalized Cost) Before you begin negotiationsDetermine how much you can spendIdentify the car(s) you are interested inDo your homework and find the dealer’s cost plus any:RebatesHoldback from manufacturerTotal markupMSRP & dealer invoice
31 Negotiating (continued) Start negotiations at dealers invoiceIf they won’t share it, go someplace that will!Both the Chevrolet and Ford dealers in the area were willing to share their invoicesOften invoice plus $ will workDealer inventory often impacts difference between invoice and MSRP (demand & supply)Date often affects dealers willingness to dealEnd of month and end of year are particularly good times to buyTell them that you will not force them to take your money!
33 5. Maintain Your Purchase Read the owner’s manual and perform regular maintenanceParticularly do oil changes every 3,000 milesDon’t ignore warning signals.You do at your peril!Choose a good garage; check training and experience
34 QuestionsAny questions on general guidelines on buying a new vehicle?
35 Lease versus Buy: Buying The lease versus buy decision is determined on three areas: goals, preferences, and available budget for transportation expenses.AdvantagesYou are protected in case of job loss or changeYou can drive unlimited miles and modify your carNo monthly paymentsVehicle can be used for any purposeDisadvantagesHigher up front costsExpensive if you get a new car every few years
36 Lease versus Buy: Leasing AdvantagesPayments are usually lower, as you only pay for portion of car you useGood if you want new car every 2 to 3 yearsYou pay sales tax only on monthly paymentDisadvantagesNo flexibility in moving, high fees and fixed mileageAt the end of the contract you don’t own the carDealers sell you a new car every few years and make more money off of youProfits can be hidden due to complexities of leasing
37 The Leasing Process: 1. Negotiate the Price (first)!
38 Negotiate the Price First (continued) Never walk into a dealership and announce you want to lease a car, and don’t talk payments either.Any competent dealer can find a way to make a car fit your budget while maximizing his profitsKnow beforehand which car you want and know how much you can afford
40 3. Calculate Residual Value Auto Residual GuidesKelly Blue Book (kbb.com)Edmund (edmund.com)Important parametersYear, make & model of autoTerm of leaseApply residual ratio to MSRP to calculate residual value
41 Residual Value Example $30,000 Price, 7.44% rate, .56 Residual ratio,$30,000 MSRPX Residual ratio (3 year lease)$16,800 Residual valueThen$30,000 Agreed upon price (may be the MSRP)<16,800> Residual value$13,200 Usage /Depreciation Fee (that portion you of the vehicle you are using)divided by the months in the lease (36)$ for the monthly depreciation payment
42 4. Determine your Costs Costs of Leasing Up Front and End of Lease feesAcquisition , Registration , License, and Document Fees (paid upfront), terminationMonthlyUsage/Depreciation (13,200 / 36 months)=$366.67Finance (($30,000+16,800) * MF or (.0744 / 24) = $ per monthSales Tax ( )= *.0625 = $31.94Total Monthly Cost of Lease = = $542.91
43 5. Maintain Your Purchase Read the owner’s manual and perform regular maintenanceParticularly do oil changes every 3,000 milesDon’t ignore warning signals.You do at your peril!Choose a good garage; check training and experience.These are the same as for buying except:If your lease extends beyond the manufactures warranty (generally 36 months), get an extended warranty to protect you!
44 QuestionsAny questions on the lease versus buy decision?
45 D. Buying A Used Automobile Key questions to ask on buying a used car:1. Can I afford this car?Will it fit into my monthly budget? Is it a need?2. Does it meet my current driving needs?What type of driving you do? Shop for a car that meets your driving patterns3. Will it meet my future needs?Consider how you will feel about this car a year or two from now. Will your family be growing?4. Does it meet my preferences?Gas mileage, sedan/SUV/truck, 2-door/4-door, safety?
46 Getting the Best DealThe cost of a vehicle is based on its reliability, performance and popularityOf course you want a car that is reliable and performs well. But do you want the same used car everyone else wants?If so, you will pay a premium for it. In some cases, the only difference is the nameplateCheck reliability atCheck your needs versus wants!
47 If You Must Finance the Car I do not recommend financing a vehicle!This is not a preferred method—don’t borrowBut if you must:Get your financing approved beforehand from a credit union or other financial institutionDo not use in-house financing unless you get special deals (0% financing) or unless it is very competitiveMake sure you read the fine print completely!
48 Getting Used Car Financing If you must borrow, there are several different lenders available for funding a dealership used car loanBanks and credit unionsThis is generally the cheapest form of borrowing (after parents)Banks will typically only finance a car that is less than five years oldAuto Dealerships.Dealerships will consistently have the worst interest rates because they are selling you their services
49 Financing a Used Car (continued) When looking for a lender, it is also important to consider the maximum length of the loanThe good news is that most banks have 60-month programs for late used modelsHowever, the older the vehicle, the less likely it will sustain for a full 60 monthsIn general, the older the vehicle, the shorter the loan length. An older vehicle is not good collateral for a loan.
50 Sources of Used CarsThe three most common places from which you can buy used cars are the following:1. Private partiesGenerally the most reasonable prices, but no warranty2. New car dealershipsSome may be backed by warranties3. Used car lotsRun by rental car agencies.Sometimes no haggle buying, competitive prices, and perhaps the factory warranty may still be in effect
51 Locating Good Used Cars Do your research -- leave no stone unturnedAsk friends, relatives (you will know more about history of vehicle)Watch for cars with “For Sale” signsWatch newspaper classifieds, bulletin boards, etc.Generally, closer is betterUse Internet sites:AutoTrader.comClassifieds2000.comUsedcars.com
52 1. Call Before You Go See a Car Create and use a form when calling-- ask key questions. Verify the:The price in the ad (ask again as they may have lowered the price since the date published)Number of milesNumber of ownersHow often oil was changed (ask for receipts)What is the blue book or recommended priceIt it doesn’t fit your criteria or the seller seems uneasy answering questions, skip the visit and keep looking!
53 Ask and Verify Key Information To verify previous ownersUse$20 for a two month subscriptionCheck out every potential vehicle as to previous owners and locations via its VIN.To verify current valueUse Edmunds.com, KBB.com (Kelley Blue Book), or superpages.comAgree as to the quality of the vehicle, i.e. excellent, good, etc. before you come to visit so you can verify a fair price
54 2. Go see “The Car” Note your first impressions Does the car appear to be well cared for? Examine for rust. Beware of newly painted cars, as this may be a cover-up for more serious damageAre there considerable dents, mismatched paint areas, or poorly fitting parts? Make sure there are no ripples in door panels, as this indicates previous accidentsCheck for body filler. Use a refrigerator magnet on suspicious spots to test for auto-body fillerLook inside the car for wear and tear on the seats and pedals. Make sure it is consistent with the mileage on the odometer
55 Check Out the Car in Person Check the underside and tiresLook underneath for evidence of fluid leaks such as coolant (greenish), oil (black), transmission fluid (pink), or gasoline (identified by smell)Take a look at the tires. A tread that’s uneven to one side is a sign of poor alignment or balanceTires must be same size. Insist on a spare, jack, and lug wrench with the dealCheck CV joint boots on either end of front axles. These are expensive to replaceWith 4-wheel drive vehicles, make sure all 4 tires are the same brand, size, and type
56 Check Out the Car (continued) Check under the hoodLook for mismatched bolts or offset paint. This may mean a front-end accidentLook at the underside of the hood. A sprayed black film on the underside usually means oil leaksExamine the engine belt for wear. Use judgment as if it breaks, you will have to pay to repair itLook for leaks and other things out of place
57 Check Out the Car (continued) Perform gauge and listening testsMake sure no emergency gauge lights are on when the engine is runningDoes the car start right away? Listen for unusual noisesWipe the inner surface of the tailpipe with a rag: white or gray dust is normal. Thick, greasy soot means the car burns a lot of oil—this can be seriousMost of you are not mechanics, but look for potential problems anyway
58 Check Out the Car (continued) Check the oil, brake, and transmission fluidAre levels ok?Take out the transmission dip stick. Does the fluid smell burned?Does it look like they just changed all the fluids? It may indicate that there is a problemCheck the oil level. A low level may indicate either a leak or an owner who didn’t care much or know much about the car
59 Check Out the Car (continued) Check the shock absorbers and lightsBounce the car up and down at each corner. (when you release it, you should not feel it bounce back more than twice)Test all lights: brake lights, headlights, reverse lights, turn signals, etc.
60 Check Out the Car (continued) Check for play (the amount that a part can move before it engages)Check for play in the steering wheel, clutch, and brakesHold brake pedal down as far as possible for 45 seconds. If they don’t hold firm, there may be a leakPush the top of one rear tire toward the car. If it moves too much, there may be bearing problems
61 3. Go for a Test Ride Take it for a drive personally How does it feel? How does it fit?Evaluate the acceleration from a stop. Does it hesitate or accelerate as it should?Check engine noise, passing acceleration, hill-climbing power, braking, cornering, suspension, seat comfortCheck for rattles and squeaks, interior controls, and the audio system. Play the radio, tape deck, CD player, etc.
62 4. Take the Car to a Qualified Mechanic Get a more complete inspectionChoose a mechanic who regularly works on these cars, generally from the dealer. Other mechanics may be only guessing as to problemsDealers may also have the car history on their computersHave mechanic do a compression check and check for oil and fluid leaksFor automatic transmissions, take the car to a transmission specialists to check out the transmission
63 5. Negotiate the Deal Notes on negotiating for a used car 1. Let the sellers know you have the cash in hand. Cash does wonders for an agreement2. Know the fair value for the car beforehand3. Negotiate politely!If the price is too high, have a persuasive argument to support ita. It needs some workb. The body or paint doesn't justify the pricec. You have seen lower prices elsewhere in the market
64 Negotiate the Deal (continued) If you just want to test their price:a. The car isn't exactly what you are looking for, but for a lower price you might be interestedb. The car is worth the price, but you can only afford a lower price (budgetary constraints)Make an opening offer that is low, but in the ballpark Expect to spend an hour negotiating Don’t be afraid to walk out if you are not getting anywhereYou don’t have to buy this car!
65 Tips for Negotiating1. Only enter into negotiations with a salesperson you feel comfortable with and who can deal2. Decide ahead of time how high you will go and walk out when you reach this price 3. Leave if you get tired or hungry -- don't be hurried into a decision 4. Don't be distracted by pitches for related items5. Expect a closer to try to improve the deal before you reach a final price
66 Closing the Deal: At a Dealership The financing and insurance person will probably try to sell you a number of additional items.Most (if not all) of these you don’t need!Review the contract thoroughly:Ask questions about anything that dramatically increases the price. You will also be asked to provide proof of insurance before you drive away in your used car. Finally, you should inspect the car before you take possession of it If any work is required or promised by the dealer, get it in writing in a "Due Bill."
67 Closing the Deal: Private Sale Before money changes hands, make sure you will be able to register the car in your nameNo registration means no deal Request the title (sometimes called the "pink slip") and have it signed over to you. No title means no dealOne way to deal with the seller still owing money on the car is to conclude the sale at the bank where the title is held Once all of the paperwork is completeRelax and begin enjoying your new purchase: a good used car
68 6. Finance the Used Car (not recommended) Finalize the financing from your bank or credit unionMake sure you understand exactly what you are getting into before you signOnce you sign, you have committed yourself
69 Funding a Person-to-Person Car Loan There is currently only a few ways to fund a person-to-person used car loan. One is with a company called People First.If you apply online, approval is in an hour. They then FedEx you a blank check.Regardless of which lender is chosen, it is important to know your credit score before attempting to get a loan.If you know whether or not you have good credit, a dealer will be unable to insist that you need a higher interest rate because of your “poor” credit, and you will have greater freedom in choosing a lender with a lower interest rate.
70 7. Take Care of Your Car Change the oil every 3-5,000 miles Wash and clean it oftenGet the recommended tune ups and careRotate the tires every 5,000 milesDrive it and take care of it like you want your car to last 250,000 miles—it may!
71 AddendumNote: even if you do all the above listed things in buying a used car, there is still the chance that you will have more expenses than you had considered.That is one of the risks of buying a used carHowever, the closer you adhere to the process explained, the less likely you will have major problems in the future
72 Useful Auto Websites Carfax Carfax.com Intellichoice IntelliChoice.com Edmunds Edmunds.comKelly Blue Book kbb.comConsumer Reports Consumerreports.org
73 QuestionsAny questions on the process of buying a used car?
74 Review of ObjectivesA. Do you understand how a car fits into your financial plan?B. Do you understand the process of how to buy or lease a vehicle?C. Do you know how to make the lease versus buy decision?Do you know how to buy a used car?
75 Case Study #1DataMaxine negotiated the price of a car with a dealer and now wants to decide whether she should lease or buy the car.Manufacturers Suggested Price (MSRP) $25,000Negotiated cost/Capitalized cost ,000Down Payment ,000Lease Term and residual Years, 55%Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300Rent charge and Loan rate (APR) %Sales tax %CalculationsHelp her decide based solely on costs. She will pay cash for the down payment, taxes on down payment, and fees but will finance the remainder (including other taxes). Assume the value at term end is the residual value
76 MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%.
77 Solution: Cost of Leasing Down Payment and fees $2,000 MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%.Solution: Cost of LeasingDown Payment and fees $2,000Taxes on Down Payment (2,000*.0625)Fees (Acq + Reg + Lic + Doc+ Term) ,185Total Paid Outside the Lease $3,310Total Lease Payments:1. Usage: [20,000 – 13,750 (55% of MSRP)] $6,2502. Interest: (Average outstanding * average rate)[(Net Cap. Cost + Residual) * Money Factor](20, ,750) / 2 * .0835/12 * 36 months) ,2273. Taxes: (6, ,227)*Total lease payments of $11,132Total Cost of Leasing (DPF+LP) $14,442Monthly lease cost: 11,132 / 36 = $309.22
78 MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%.
79 Solution: Cost of Buying Down Payment and fees $2,000 MSRP 25,000, Negotiated/Capitalized Cost 22,000, Down Payment 2,000, Lease Term and residual 3 Years and 55%, Fees: Acquisition $500, Registration $150, License $35, Documentation $200, Termination $300, Rent charge and Loan rate 8.35%, and Sales tax 6.25%.Solution: Cost of BuyingDown Payment and fees $2,000Taxes on down paymentUpfront Fees (Reg. + License + Doc.)Total Paid Outside the Loan $2,510Remaining Amount $20,000Remaining taxes (20,000)* ,250Total Amount to Finance including taxes $21,250Total Payments over holding period-21,250 PV, 8.35%, 36 N, PMT=669.33* ,096Total Cost of Vehicle (Financed + DP + fees) $26,606Market value of car at end of the loan (residual) (13,750)Total Cost of Buying DP+UF+TP+T-MV $12,856Monthly Purchase Payment $669.33
80 Case Study #2DataAndrea is considering the costs of owning a vehicle valued and sold for $30,000. Auto Loan Amount: $30,000, Duration: 4 years, APR: 8.65%Property taxes: 2% of the vehicle value per yearSales Taxes: 3% of the sales priceTitle and Tags: $40 per yearMaintenance and Usage Costs: $1,500 per yearInsurance: $2,000 per yearCalculationsCalculate the total first year cost of ownership.
81 Case Study #2 Answer$30,000 4 years APR 8.65% will have payments of $ x 12 =$8, payments in year 1$600 Property Tax$900 Sales Tax$40 Title/tags$1,500 Maintenance/usage$2,000 Insurance$13, for the total cost for the first year