8 | 1 Chapter 4: Consumer Purchasing Section 4.1 Consumer Purchasing  Today’s Agenda: 1.What influences your buying decisions? 2.Examine a research-based approach to buying 3.Strategies for making wise buying decisions  Goal: Learning how to use various techniques to get the best value for your money!

8 | 2 Economic Factors Social Factors Personal Factors Figure 4.1 How might each of these factors affect our purchases? Why do we buy what we buy?

8 | 3  Convenience  Cash vs. Credit  Price vs. Quality  Online Purchasing Forces us to think about priorities, consequences. How do You shop?

8 | 4 Before Phase 1: Before You Shop, Ask…  What do I really need?  What information will help me?  Do I know enough to make an informed decision? What does pre-shopping research involve?

8 | 5 1. Identify Your Needs – WANTS vs. NEEDS Have an open mind; think of ALL your options 2. Gather Information – Brands? Costs? Options/Features? Consequences – Where can you find reliable information? – Do you spend enough time? Too much time? 3. Know the Marketplace Knowledge = POWER

8 | 6 Phase 2: Weighing the Alternatives There are usually lots of options! Consider all of them! 1.Compare Features (what is important to you?) –Design? Quality? Performance? LOOK? 2.Compare Prices – Does Price = Quality? 3.Compare Vendors –Go to different stores, look online –When is this especially useful?

8 | 7 Phase 3: Making the Purchase 1.Negotiate the Price (if possible!) 2.Decide on Credit or Cash – Costs? – Benefits? 3.Know the Real Price – Does the listed price include everything? Phase 4: After the Purchase 1.Rethink your purchase 2.Did you make the right choice? Why evaluate?

8 | 8 1.Time Your Purchases Law of supply and demand 2.Store Selection Benefits vs. Limitations 3.Compare Brands Generic vs. National Brands? Can you tell the difference?

8 | 9 Impulse Buying can ruin a budget! Try a 2-day cool-down period Pg Examine Labels Cool Advertising 5.Compare Prices Unit Pricing Is bigger always better? $45 $9

8 | 10 Unit = VolumeUnit = Weight

8 | 11 Supplement to Chapter 4 Purchasing a Vehicle  Today’s Agenda:  Learn what it means to “LEASE” a vehicle  Goals: Understand how a lease works & how it compares to buying a vehicle Recognize the factors that affect the cost of a lease Identify the advantages / disadvantages of leasing

8 | 12 Review Our Car “Purchase” Terminology: –The 3 prices you found –Consumer reviews, fuel economy, depreciation MSRP TMV Invoice Price

8 | 13 What happens to the value of my car over time? RESIDUAL VALUE The value of my car at any given point in time is it’s “RESIDUAL VALUE” MSRP = $18,350

8 | 14 Let’s BUY it! 2011 Mazda3 i Sport Advertised Price: $16,338 Add tax, license, registration: = $18,000 Borrow $18,000 over 3 7% Guess I need a loan!

8 | 15 $233

8 | 16 What does it mean to “LEASE” this car for 3 years? I will “rent” this car… it will depreciate as I drive it. Value after 3 years? When my lease is up, I simply return vehicle to dealership.

8 | 17 In a LEASE, you only pay for what you use: Car is worth 60% of its original MSRP at this point: 60% of $18,350 = $11,010 $11,010 $7,340 DEPRECIATION RESIDUAL $18,350 You pay for the DEPRECIATION!

8 | 18 You pay depreciation + sales tax (on this amount) + interest (for borrowing ) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ $600 $450 $7,340 $ payments What is my monthly cost to lease this vehicle for 3 years?

8 | 19 Let’s look at the “BUY” option again… After 3 years I have paid $18,000 and the car is MINE. After 7 years, Residual value is $3000 If I sell for $3000 after 7 years, what was my overall cost? $18,000 paid - $3,000 received = $15,000 (or $178 per month)

8 | 20 LEASING… The good and the bad: Advantages:  Lower monthly payment  Save on sales tax  Always under warranty  Afford nicer car Disadvantages:  Restrictions on mileage  No equity (ownership)  Charges for excess “wear”  Always a payment!

8 | 21 CONCLUSIONS… Leasing can be confusing! Cost to lease depends on a car’s depreciation Leasing is wise in certain situations… –Decide if it is right for YOU! Long-Term: Buying is Cheaper Middle (4-5 yrs): Even Short-Term: Leasing Wins

8 | 22 Information = Power Smart shoppers do their homework! beforeWhy gather information before interacting with sellers???? Remember: sellers are highly skilled; not objective The key to successful negotiating: enough knowledge and accurate information

8 | 23 1.Pre-Shopping Thoughts: Determine your affordability (look at budget) Think about your choices: buy used; buy new; lease; bus! (what works with your budget?) 2.Start Research Investigate makes, models (talk to friends, read reviews) Narrow down choices based on what is important to YOU: => Safety, features, fuel efficiency, warranty?

8 | 24 Examine your financing options  Remember: If you are taking out a car loan, what 2 factors will affect your monthly payments? 1.Interest rate: –Check with local bank/credit union –Know your credit score! –Is manufacturer or dealer offering any special financing deals? 2.Term: how many months to pay off loan –Trend: longer-term financing--what does this do?

8 | 25 Other things to research: –Available rebates / incentives? –Reviews? –Comparable vehicles / feature comparisons? –Depreciation? –Warranty? Do you have a vehicle to trade-in? (Find out its value BEFORE talking to salesperson) Tips on Negotiating your trade-in: Treat the purchase and trade-in as separate transactions Come to agreement on purchase price of new car Then, negotiate a price for your trade-in Sell the vehicle yourself if they come in too low

8 | 26 Get Organized? 3 Basic Options to Consider: Sheet One: New Car Buy Negotiate one thing at a time. With many other variables (new car price, trade-in, rebates, options, interest rate) the dealer can APPEAR to be cooperative on one aspect and make up the difference elsewhere! –MSRP vs. Invoice Price vs. TMV –What do each of these mean?

8 | 27 Sheet Two: Used Car Buy Remember: Late model used car with low mileage = practically “new” ! Research pricing: -Trade-In vs. Dealer Retail vs. Private Party -What do each of these mean? Most research, including inventory searches, can be done online / in newspapers Sheet Three: Leasing a Vehicle What is an automobile lease? Read handout

8 | 28 Leasing Terminology 1.Capitalized Cost [Cap Cost]  Negotiated price of vehicle 2.Cap Cost Reduction  Down payment, trade-in, or rebate that will reduce the amount being financed 3.Adjusted Cap Cost  Cap cost – cap cost reductions: the actual amount being financed 4.Residual Value  The projected value of the vehicle at the end of the lease 5.Money Factor  Similar to APR to finance vehicle (multiply by 2400 to compare) 6.Price of Vehicle – Residual Value = Depreciation DEPRECIATED VALUE = $7,000 RESIDUAL VALUE = $13,000

8 | 29 Leasing Advantages: More car for the money because lower monthly payments Best when depreciation is low (residual value is high) Cheaper in the short-run Leasing Disadvantages: At the end of lease you don’t own the car Usually more expensive in the long-run Mileage allowance 7. Open-end lease vs. Closed-end leases 8. Excess mileage charges 9. Acquisition fee 10. Disposition fee 11. Early termination fee In general, be cautious about leasing: It is complicated. Remember: Knowledge = Power