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want

A want is unnecessary but desired. In truth, very few needs exist, yet in everyday language, people talk often of ''needing'' certain things. Avoid calling something a need because this may make it no longer open to careful consideration. Instead, consider all purchase options to be wants even though some wants are more important than others. The most important can be determined by prioritizing your wants. This approach allows for consideration of 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.

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.

loan preapproval

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. Interest rates for all types of loans, including vehicle loans, can be found at www.bankrate.com. Buyers should obtain multiple quotes from banks and credit unions. When shopping for a major purchase, ask your local bank or credit union 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.

disposition fee

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.

full warranty

A full warranty includes three stringent requirements: 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.

limited warranty

A limited warranty includes less 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.

need

A need is something thought to be a necessity.

early termination charge

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.

extended warranty

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 warranties are not insurance but act similarly. For example, a 40-inch 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 little 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. Buy a service contract only from the actual manufacturer or dealer that sold the item. 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 service contract plans; in addition, a number of independent companies 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 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 got a discount.

gap insurance

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. Many 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.

upside down

Beware of taking out a longer loan on a vehicle purchase, such as for five or more years, because the value of your car may be less than the amount you owe. This is known as being upside down because you have 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.

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.

2. Capitalized cost reductions (cap cost reductions)

Capitalized cost reductions (cap cost reductions) are monies paid on the lease at its inception, including any down payment, trade-in value, or rebate.

comparison shopping

Comparison shopping is the process of comparing products or services to find the best buy.

excess mileage charge

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)].

open-end lease

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. 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.

leasing

Leasing a new vehicle is an increasingly attractive option to people who are in the market for a car. About 20 percent of the new cars ''sold'' each year are actually leased. It is even possible to lease used cars. Is leasing a better deal than financing? You cannot answer this question until you understand some basics and risks of leasing. When leasing a vehicle or any other product, you are, in effect, renting the product while the ownership title remains with the lease grantor. 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. Rule number one 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.

balloon automobile loan

One option for people considering a lease 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 $1000 to $7000, the borrower generally has three options: 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.

rebate

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 move 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. Many 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. The Run the Numbers worksheet on page 230 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).

closed-end lease (also called a walkaway lease)

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. With a closed-end lease, you would pay the residual value.

acquisition fee

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.

planned buying

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 car or making other ''big ticket'' purchases. 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 fourth step in the buying process. Steps 5 and 6—negotiating and making the decision—follow. The seventh 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.

rule of three

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.

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 magazines. If you know someone who drives a car you're considering, ask that person's opinion of it.

3. The adjusted capitalized cost (adjusted cap cost)

The adjusted capitalized cost (adjusted cap cost) is determined by subtracting the capitalized cost reductions from the gross capitalized cost.

dealer invoice price (base invoice price)

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; 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.

early termination payoff

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.

1. The gross capitalized cost (gross cap cost)

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.

5. The money factor (or lease rate or lease factor)

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.''

4. The residual value

The residual value is the projected value of a leased asset at the end of the lease time period.

implied warranty

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. To avoid them, the seller can state 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.

warranties

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.

express warranties

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.

Consumer Reports

You can also research a car in Consumer Reports, a 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.

manufacturer's suggested retail price (MSRP)

You will see two prices when you walk into a 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.