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Decision-Making Methods for Major Purchases

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  • 0:00 What Is a Major Purchase?
  • 0:24 Needs Vs. Wants and…
  • 2:10 To Buy, Rent, or Lease?
  • 4:25 Pricing and Payments
  • 5:32 Keeping Good Records
  • 6:03 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

What is a major purchase? This lesson will teach you decision-making steps for making a major purchase. You will learn how to determine if the purchase is a need or a want and how to explore other important factors before and after the purchase.

What Is a Major Purchase?

William racked up over $100,000 of debt. As a result, he enrolled in debt counseling. William is now attending a Decision-Making for Major Purchases course. Major purchases include: appliances; fixing large home repairs; purchasing a house, car, or furniture. Take a look at what he is learning.

Needs vs. Wants and New vs. Used

The class facilitator, Jeanine, asks participants to discuss needs and wants. There were many comments, one of which defined a need as essentials required to survive, such as food, clothes, and shelter. Whereas wants are products or services that make you more comfortable or fulfill desires or wishes.

Distinguishing between needs and wants minimizes impulse buying and overspending. Jeanine gives the participants a few minutes to mentally categorize their debt as needs or wants. William shared that 80% of his debt was wants (unnecessary purchases). This exercise helps consumers realize their financial pitfalls.

Once a consumer determines the nature of the purchase, the next step is to evaluate costs. Buying used items may provide the same level of benefit, but inexpensively. Jeanine uses the example of purchasing a car and lists the advantages of a new car: manufacturer warranty, reliability, and minimal maintenance. However, depending on your financial situation, the disadvantages may supersede the benefits: a higher price or payment and immediate depreciation - as soon as you drive off the lot.

A pre-owned vehicle may provide a substantial benefit, especially when rebuilding a financial situation. Advantages include lower payments and certified warranties. A certified warranty means the dealerships thoroughly inspects pre-owned vehicles and offers warranties similar to new cars. However, without a warranty, pre-owned vehicles are sold 'as is,' leaving the buyer to pay for possible exorbitant repair costs. Applying the same comparison analysis to other large purchases may save money over the long run.

To Buy, Rent, or Lease?

William tells the class he's found success in leasing and asks Jeanine to discuss the alternative. Jeanine explains that leasing represents a contractual arrangement between the lessor and lessee, whereby the lessee obtains the right of use in return for payments. A classmate mentions she's heard of leasing a vehicle, but what else can be leased? Jeanine explains items like appliances and electronics can be leased. She then asks who has heard of lease-to-own or rent-to-own? The instructor explains that renting allows for short term commitments. If you were moving to a new town and looking for permanent housing, you might rent a place to live. Leasing is more long-term or fixed. Once you've found a location in close proximity to your work, you might sign a lease agreement for two years. The own portion refers to making payments towards ownership rather than a right to use and returning or vacating later.

Depending on the situation, there are advantages to leasing or renting over buying. This includes the fact that when leasing or renting, it's likely that:

  • Repairs are covered
  • The down payment is minimal
  • Monthly payments will be lower

However, there can be disadvantages to renting or leasing as well. Disadvantages may include:

  • Lack of ownership if the option is not available
  • Higher costs over the life of a term due to miscellaneous fees
  • Being careful to not break the contractual arrangement; this could result in significant costs

When considering whether to go new or used, or rent versus own, Jeanine explains to the class they will want to think about a few more details:

  • How long you'll stay in the property or keep the product?
  • What is the quality of the item?
  • What is the seller's reputation?

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