Personal Finance Ch. 8: Vehicle and Other Major Purchases (Study Guide)

arbitration

neutral third party hears (or reads) the claims made and the positions taken by parties in the dispute and issues a ruling that may or may not be binding on one or both parties.

depreciate

new vehicles and low mileage used cars go down in value very quickly after purchase, often as much as 20 percent after leaving the dealer's lot.

negotiating/haggling

process of discussing actual terms of agreement with a seller, usually on higher-priced items

best buy

product or service that, in the buyer's opinion, represents acceptable quality at a fair or low price for that quality level

Residual Value

projected value of a leased asset at the end of the lease time period

high-balling

sales tactic in which a dealer offers a trade-in allowance that is much higher than the vehicle is worth

dealer invoice price (base invoice price)

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

gross cap cost

includes vehicle price + cost of any extra features like insurance or maintenance agreements

want

item not necessary but desired

need

item thought to be necessary

Comparison Sop by Window Shopping

- goal is to just go look, not buy - leave credit card, check book home

Financing v Leasing

- 30% of new cars are leased - Leasing you don't own the car, renting - Many people lease because they can't afford to "purchase" new car - hmm, purchase not fitting the budget.

Comparison Shop for Financing

- Loan or Lease for new car 1. lowest payment isn't always the best plans. 2. better terms available at banks, credit unions and not sellers 3. avoid the LONG TERM borrowing (5 years or more) - value of car could be less than amount you owe = upside down 4. Avoid high interest rate auto payments 5. Choose between low interest & rebate - rebate is refund of part of purchase price

Dealer Financing v. Rebate

- Low APR v. Rebate - Add rebate amount to finance charge and calculate APR using n-ratio. - Other side, deduct rebate from cost of car plus any down payment and get APR.

Finanlize a Car Deal

- dealers try to "low ball" - they'll try to negotiate price when finalizing paperwork. "get manager approval"

Subprime Auto Lending

- for people with low credit scores (640 or lower) - 20% of car loans done this way - higher interest rates, poor collateral, less favorable terms

Insurance/Maintenance on Cars

- maintenance is lower on new cars than a 5-10 year old car - new cars have warranties. - new cars have lower operating costs - better fuel efficiency. - insurance is lower on older cars - new cars have higher collision costs - repairing new cars is more expensive - repairing an older car you can get used or non-original parts to reduce costs - new cars are designed to "crush" in accident to protect driver, leads to higher repair costs.

Comparison Shop for Safe Vehicle

- size and weight - forward collission warning (FCW) - automatic emergency Breaking (AEB) - V2Vcrash-avoidance system - Extra airbags - Stability control - Adaptive cruise control (ACC) - Blind-spot warning - Backup visibility - Automatic high beams - Lane Departure warning (LDW) - Pothole detection technology - Parking assist system - Self driving cars - Safety Tests - Recalls on used cars

Express Warranties

- written and oral warranties - Federal Magnusson-Moss Warranty Act (applies if sold > $15) - two types: Full and Limited 1. Full Express Warranty - product must be fixed at no cost to buyer within a reasonable time after the owner has complained. - owner will not have to undertake an unreasonable task to return product for repair - defective product will be replaced with a new one or the buyers money will be returned if product cannot be fixed after a reasonable number of attempts. 2. Limited Express Warranty - offers less protection than full. May only offer free parts, but not labor.

Common Leasing Fees

1. Acquisition Fee: paid in cash or included in gross cap cost. Pays for credit report, application fee, other paperwork. 2. Disposition Fee: Turn in vehicle at end of lease, have to prepare for resale 3. Early Termination Charge end lease early; can also happen if leased vehicle is traded or totally wrecked or stolen. - get a written disclosure of these charges

Pitfalls of Leasing to Avoid

1. Avoid paying money up front 2. Avoid being upside down with gap insurance; buy from insurance company not the dealer. 3. Avoid paying maintenance on leases that are too long. Paying for new tires, brakes, etc. on a car you don't own makes no sense, 3 yrs/36K is norm. 4. Avoid paying for driving extra miles. 5. Avoid paying "full market price" for repairs. Know what the lease says about this.

Costs to look at

1. Direct Costs 2. Opportunity Costs: some want or goal that will be less attainable if given want is satisfied. Example: you might buy a car with a sunroof but that might mean you can't afford one with auto start feature.

Key Things ToDo when Shopping for Major Purchases

1. Get THREE quotes 2. Negotiate price 3. Negotiate financing terms 4. Fit purchase into your budget b4 buying 5. Car: look at repair ratings 6. Purchase late-model used car instead of new. 7. Seek redress if dissatisfied

5 important things in a car lease

1. Gross Cap Cost: price of vehicle plus what lessee paid to finance plus other items lessee agreed to pay over life of lease - insurance and maintenance 2. Cap Cost Reductions: money paid at beginning of lease - down payment, trade-in value, or rebate 3. Adjusted Cap Cost Gross Cap Cost - Cap Cost Reductions 4. Residual Value value of car at end of lease 5. Money Factor Rent portion of the lease. - See "Run the Numbers", pg 238

Shop for Warranties

1. Implied Warranty 2. Express Warrany

Fit Budget to Purchase

1. Know what you can afford 2. Fit payment into a monthly budget

Is Leasing better than financing?

1. Monthly costs is always lower because payment is based on depreciation value of car. 2. Leasing is also less because sales tax is based on lease payment rather than purchase price of car. 3. Analyze the "5" key things about a lease a. Gross Cap Cost b. Cap Cost Reductions c. Adjusted Cap Cost d. Residual Value 5. Money Factor (lease rate)

What's important when considering a lease?

1. Negotiate purchase price before discussing lease 2. Lease requires cash outlay of first months lease payment and a security deposit. 3. Lease payments are based on gross cap cost - cap cost adjustments - residual value / mos. on lease Single Payment Lease: some leases have a single payment which is paid upfront Monthly Payment Leases: Lease payments are based on gross cap cost - cap cost adjustments - residual value / mos. on lease. This is better because you're only paying for depreciating value of car, not entire cost.

Open Ended v. Closed Ended Leases

1. Open Ended Leases - pay difference between projected residual value and actual market value at end of lease. You can wind up owing more if car has depreciated to much. - can purchase at end of lease for actual cash value Consumer Lending Act: Limit on end of lease payment equal to 3 times average monthly payment. 2. Close-Ended Leases - Most car leases are close ended - pay no fee at end of lease if market value of car is lower than projected residual value. - may have some charge is wear and tear is greater than normal or excessive mileage - can purchase at end of lease for residual value

7 STEPS in Planned Buying

1. Prioritizing wants 2. Preshopping research 3. Fitting your budget 4. Comparison shopping 5. Negotiating 6. Making the decision 7. Evaluating the decision

Implied Warranty

1. Product sold is warranted to be suitable for sale (warranty of merchantability). - work effectively whether or not written warranty exists - seller knows buyers use; buyer relies on sellers expertise or judgement in choosing product. - creates a Warranty for Fitness for a particular purpose; - required by state law - only way to avoid is if seller says in writing "sold as is"; buyer has no legal recourse. - USED CARS are commonly this.

What goes into the leaser contract

1. Purchase Price 2. Lease Payments 3. All Fees 4. Any oral agreements 5. Trade in value 6. Any rebates

Thinking about car purchase

1. Think specifically about the car: type (SUV, electric, gas, hybrid, sedan, coup, pickup), model, brand, features, mileage, reliability, maintenance costs, safety. 2. Does it fit your financial goals? - best to buy late-model used car, drive for 10+ years or 200K miles. 3. Make a list for every important decision (decision matrix)

Small Claims Court

A special court in which parties can litigate small claims without an attorney. Usually in range of $500-$5000.

Balloon Auto Loans

DO NOT DO THIS - have to make large 1 time payment at the end of the loan to reduce monthly payments - older the car, less equity they have and they might not be able to sell car and make that payment. - If you can't pay balloon: 1. hand over ballon payment and keep car 2. Return car to lender to pay for balloon 3. Refinance care with lender or borrow from another source 4. Sell car to payoff balloon payment 5. Trade car in on a replace vehicle and roll over balloon with into new car loan

cooling off rule

Def: A Federal Trade Commission rule that gives consumers three days to cancel a contract of $25 or more after signing it for a sale made anywhere other than a seller's normal place of business. - Does NOT APPLY TO CARS - Applies to sales at buyer's home, workplace, dorm, facilites rented by seller temporarily or short term like hotel, convention center, fairgrounds, restaurants, presentations in your home - does NOT apply to sales by mail or telephone, to meet an emergency, real estate, insurance, or securities. - Salesperson has to tell you about cancellation rights - Salesperson has to give you cancellation form and copy of your receipt.

service agreement

Def: An agreement between the contract seller and buyer of a product to provide repair or replacement for covered components of the product for some specified time period. - its insurance against repair bills AVOID THESE - bad buy; better to set aside money for rainy day vehicle repairs.

Negotiate Your Car Price

Def: process of discussing actual terms of agreement with a seller, usually on higher-priced items. 1. Discover Dealer Holdback % of MSRP manufacturer holds and then gives back to dealer at end of certain time period. 2. Maybe work with New Vehicle Buying Sservice - they'll negotiate for you 3. Work with Professional Shoppers 4. Obtain FIRM PRICE for desired vehicle with desired features before discussing other aspects. 5. Start from low price rather tjhan asking price or dealer invoice price 6. Obtain prices from THREE DEALERS and tell them you're doing that. 7. Negotiate your Interest Rate 8. Negotiate your Trade-In 9. Play "Good Cop-Bad Cop"

Lemon Laws

Def: state laws that provide guidelines for arbitrators to use to order a dealer's buyback of a "lemon" as defined under the law- commonly a car that has been in the shop four or more times to fix the same problem - Applies to NEW CARS - guidelines arbitrator can use to order dealers to buyback a lemon - What is a Lemon? 1. repaired 4 tmes for same problem 1 year after purchase. 2. Buyer has to go through warranty process 3. If not resolved, can have a hearing

buyer's remorse

Feeling regret or concern after making a large purchase; DOES NOT APPLY TO CARS

adjusted cap cost

Gross Cap Cost - Cap Cost Reductions

redress

The process of righting a wrong

comparison shop

To compare the price and quality of similar goods and services to get the best buy.

as is

Way for seller to get around legal requirements for warranties, the buyer takes all risk of nonperformance or other problems despite any salesperson's verbal assurances.

Mediation

a neutral third party works with the parties involved in the dispute to arrive at a mutually agreeable solution.

dealer holdback/dealer rebate

a percentage of the total MSRP that the manufacturer holds and then gives back to the dealer, often at the end of the year or quarter

low-balling

a sales tactic where the seller quotes an artificially low price to obtain a verbal agreement from a buyer and then attempts to raise the negotiated price when it comes time to finalize the written contract

decision-making matrix

a system that allows one to visually and mathematically weigh the decision you are about to make. - Attribute, Weights, Weighted Value (Attribute x Weight). - See Table 8-1, pg 245

warranty

a type of guarantee that a manufacturer or similar party makes regarding he condition of its product.

limited warranty

any warranty that provides less protection than a full warranty

Warrant of fitness for a particular purpose

here the seller (or provider or manufacturer) knows the buyers particular use and the buyer relies on the seller's expertise or judgement in choosing the product.

excess mileage charge

fees assessed at the end of a lease if the vehicle was driven more miles than originally specified in the lease contract

preshopping research

gathering information before actually beginning to interact with sellers 1. Know the price you should expect to pay 2. Break the dealers code on new vehicle prices: a. Manufacturer Price (MSRP) b. Dealer Invoice Price GOAL: get lowest real price, those 2 numbers are artificial. 3. Online is great source for car info 4. Know the Value of your Trade-In - look at edmunds.com - price you'd get if sold car yourself 5. Assess Environmental Impact

closed-end lease

the most popular form of automobile lease; often called a walk-away lease, because at the end of its term the lessee simply turns in the car (assuming the preset mileage limit has not been exceeded and the car hasn't been abused)

MSRP (manufacturer's suggested retail price)

the price that manufacturers suggest retailers use to sell their merchandise

buyer's order

written offer that names a specific vehicle and all charges; only sign such offers after the salesperson and sales manager have signed first