Car Lease And Customer Preference

Transcript

CHAPTER 1 Car Lease Selection with respect to Customer Preferences in Islamabad 1.1 INTRODUCTION 2 Car Lease Selection with respect to Customer Preferences in Islamabad 1.1. INTRODUCTION A lease is a private contract between the leaseholder and the landlord. When a car changes hands, the seller assigns all the rights and responsibilities of the lease to the purchaser, including any future service charges that have not yet been identified. It is an important document and leaseholders must ensure that they have a copy and that they understand it. The wording of leases is usually in legal language and can vary from asset to asset. Leaseholders who cannot understand their lease should get advice. Technically, a lease is a legal agreement between two parties that specifies the terms and conditions for the rental of an asset, which, in this case is a car. In general, the agreement is not between you and the car dealer, rather it is between you and a leasing company chosen by the dealer. In other words, the car is actually sold to the leasing company who, in turn, rents the car to you. The dealer simply acts as an agent for the leasing company and negotiates the terms under which you will rent the car from the leasing company. When you lease, you pay a significant amount of interest on the transaction. And there are tax and license fees. And all cars don't depreciate evenly. But still, the basic concept of leasing is that you pay for the depreciation of the car (Edgerton, 2001). Signing a leasing contract means that “you agree to make regular monthly payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and take good care of the vehicle” (Kay, 1997). Further, you agree that you'll keep the car for a specified number of months and you're expected to stick it out to the end. 3 Car Lease Selection with respect to Customer Preferences in Islamabad The lease sets out the contractual obligations of the two parties, what the leaseholder has contracted to do, and what the landlord is bound to do. Leaseholders are not necessarily entirely free to do whatever they want in or with the car. The first thing to understand is that leasing is not renting. When you lease a car, you are arranging for the vehicle to be sold to a leasing company, usually an arm of the manufacturer. The leasing company then lets you use it for a monthly fee over a set period of time. When the term of the lease is up, you have the option that is you can return the car to the dealer and walk away without paying anything else. Or you can buy the car for a prearranged lump sum, which is known as the vehicle's "residual value." the number of factors that go into calculating the monthly payment is very complicated. When you lease a car, what you are paying for is the car's depreciation over the term of the contract, plus interest, taxes and fees (Sutton, 2001). Depreciation is the difference between the car's value today (the price) and what it will be worth at the end of the lease i.e., the prearranged residual value (Edgerton, 2001). As in a sale, the price (i.e., capitalized cost) is negotiable. It can be cut automatically with a down payment or a trade-in. You can also negotiate the upfront costs, such as the acquisition fee and security deposit, to get a better deal. Leasing a car is a great way to drive a new model car and be able to switch to a newer one every couple of years without the hassle of trying to sell your old car or trade it in. Leasing has become more popular lately and seems to continue growing in popularity. The lack of commitment to one car entices many people. Leasing also has the benefits of lower monthly payments than buying a car, a low up front cost, and a solid warranty that will cover you for the entire term of your lease. This will cut back 4 Car Lease Selection with respect to Customer Preferences in Islamabad on your maintenance costs. Even though leasing may have its benefits, it may not be for everyone. At the end of the lease you're expected to return your vehicle to the leasing company with no more than normal wear and tear. You'll have to pay for any damage or extra mileage over and above your contract-specified limits. You may have an option to purchase your vehicle at lease-end for a specified price, if you choose. Or you may be able to use the car as a trade-in on a new car. Otherwise, you can simply return the vehicle to the leasing company and walk away. However, because you might just have equity value in your vehicle that you don't want to simply give back to the leasing company. Leasing can be a tricky business. That’s why you need professional advice on the topic. The information in this section can be used by banks, dealerships and leasing companies to train their sales personnel and most importantly the customers, whether you’ve leased before or are new to the arena. Whether you are trying to analyze and compare leases or simply deciding whether to lease at all, going into the process without a fundamental grasp of the concepts will end up costing you money. Surprisingly few individuals who will either lease or seriously consider leasing, will enter into their transaction with a rock-solid understanding of how leasing works and whether it best suits their driving habits and financial preferences. Consumers may, of course, rely on the dealer to tell them that they really got a good deal. But, today with more educated shoppers especially Internet shoppers most would rather make that judgment themselves. In order to do so, we must begin with an understanding of the idea behind leasing. 5 Car Lease Selection with respect to Customer Preferences in Islamabad A company generally has three options in financing capital assets: Leasing, Financing and Paying Cash (Aghili, 1998).In this study we will focus on what factors to consider while leasing and the benefits and disadvantages of leasing. 6 Car Lease Selection with respect to Customer Preferences in Islamabad 1.2 RESEARCH QUESTIONS 7 Car Lease Selection with respect to Customer Preferences in Islamabad 1.2. RESEARCH QUESTIONS This research is devoted to analyzing the importance of factors for determining customer’s preferences in selection of car leasing. In the process of this study, the following questions are actively tackled: 1. Is there an importance of the following factors in customer buying behavior with respect to their purchasing power: 1.1. Monthly Payments 1.2. Projected Value 1.3. Service Provided 1.4. 1.5. Tenure of Lease Interest Rate 2. Does depreciation of the vehicle have an impact on customer’s decision making on leasing a new or a used car? 3. How does customer purchasing power influence customer’s decision in buying a capital or operating lease? 4. Does the knowledge of the term’s and conditions influence customer’s preference in selection of lease? 5. Does the risk of buying second hand cars influence customer preference in an underdeveloped country like Pakistan? 8 Car Lease Selection with respect to Customer Preferences in Islamabad 6. Is there an importance of the following factors in consumer’s decision making in buying with respect to the terms of the early termination option in future: 6.1. Disposal Fee 6.2. Past Due Payments 6.3. Remaining Depreciation due 6.4. Early Termination Penalty 9 Car Lease Selection with respect to Customer Preferences in Islamabad 1.3 OBJECTIVES 10 Car Lease Selection with respect to Customer Preferences in Islamabad 1.3. OBJECTIVES The main objectives of the study are: 1. To identify the different types of car leasing options available to the customers. 2. To find out customer preferences with respect to their purchasing power. 3. To identify what factors customers need to consider while making a car leasing decision. 4. To identify the problems some problems the customers face. 5. To help leasing customers in making a buying decision. 6. To make customers aware that lease is negotiable. 7. To find out different customer’s preference reasons e.g. their purchasing power’s influence on the lease factors. 8. To find out how much the customers are willing to spend and how this influences their decision for interest rates, down payments, installments, conditions for different time period and their requirements. 9. To help organization find out their customer preferences so they can give the best out of them, since customer is the main aspect of an organization. 10. To help firms by making them aware of what their customers want and what combination they can provide to best suit their customers. 11. To find the risk of buying second hand cars and lease termination policies affecting customer’s decision. 11 Car Lease Selection with respect to Customer Preferences in Islamabad 1.4 SIGNIFICANCE OF THE STUDY 12 Car Lease Selection with respect to Customer Preferences in Islamabad 1.4. SIGNIFICANCE OF THE STUDY This study is aimed at serving multiple purposes: • To The Customers: The study will help customers by bringing awareness to them, about the different kinds of lease options available to them. This will also bring them awareness on how som-e sales people don’t show them the exact figures that they need to know in making a favorable deal. The study also gives the customers an understanding of buying a new or a used car and what factors need to be considered while buying a used car, for example depreciation, early termination policies etc. • To The Leasing Organizations: Considering that organizations devote most of their attention to the customers, in order to make loyal customers, the organization them self need to be loyal to their customers. This study may help organizations in knowing what their customer’s preferences are, so they can design their packages that best suit their customers target market. • To The Society At Large: Societies are composed of people. When people who form societies are honest and loyal, societies prosper. Organizations are a major chunk of a society. Thus, sales people should be honest to the customers while making a deal with them. This will 13 Car Lease Selection with respect to Customer Preferences in Islamabad help both the customers and the leasing organizations, thus helping in building a prosperous society in the end. The study also mentions the sales person scams. • To Future Researchers: Just as this study has benefited from the research of others, so can future research benefit from this study. Since in Pakistan the concept of leasing is new, not much research has been done on it. Thus, this study will provide sufficient groundwork for future researchers. This study can also highlight one extremely important dimension to future researchers, i.e. after realizing the significance of various factors, future focus can be paid to devise ways to make packages that best suits their customers. The best features of different approaches to conducting a new type of package that is more flexible, encompassing and resourceful for their customers. Perhaps future researchers can fine-tune the system of what is recommended in this report. 14 Car Lease Selection with respect to Customer Preferences in Islamabad 1.5 SCOPE 15 Car Lease Selection with respect to Customer Preferences in Islamabad 1.5. SCOPE The research is a case study limited to Islamabad only. This project does not generalize to the entire population it relates to only one geographic area, which is Islamabad in order to focus the study and find out the real perception of customers. The research therefore targets this project only on customers in Islamabad. The research cannot be guaranteed to customers for all geographic areas and may vary on how different leasing terms offer different packages, it only compares customer preferences according to their income group or purchasing power etc and a customer behavior in general only in Islamabad due to some limitations that have been mentioned in the project. This research can however be replicated in other geographic areas. 16 Car Lease Selection with respect to Customer Preferences in Islamabad 1.6 LIMITATIONS 17 Car Lease Selection with respect to Customer Preferences in Islamabad 1.6. LIMITATIONS This project may have some correction error for inaccuracy, which may arise due to the following limitation: 1. Problem arising in one geographic area i.e. Islamabad which may not be the same for any other geographic area. 2. Lack of Primary data regarding research on leasing customer’s buying behavior 3. Although most problems would be the same for leasing in every geographic area, some problems of Literature Review may not be applicable to Pakistan 4. Limited sample size (population) 5. Limited resource e.g. Money, etc. 6. The time horizon within which this study was to be completed was very little. 7. Response from some customers may not meet expectation (questionnaires may not have been filled out truly on how they actually behave) 8. Secondary data collected from sources might have some degree of misreporting in them 9. Some respondents may be reluctant to openly discuss their income group or purchasing power due to privacy reasons. 10. The human and financial resources required to distribute and retrieve questionnaires were inadequate and a real test of patience. 18 Car Lease Selection with respect to Customer Preferences in Islamabad CHAPTER 2 19 Car Lease Selection with respect to Customer Preferences in Islamabad 2. LITERATURE REVIEW A lease is a private contract between the leaseholder and the landlord. When a car changes hands, the seller assigns all the rights and responsibilities of the lease to the purchaser, including any future service charges that have not yet been identified. It is an important document and leaseholders must ensure that they have a copy and that they understand it. The wording of leases is usually in legal language and can vary from asset to asset. Leaseholders who cannot understand their lease should get advice. Technically, a lease is a legal agreement between two parties that specifies the terms and conditions for the rental of an asset, which, in this case is a car. In general, the agreement is not between you and the car dealer, rather it is between you and a leasing company chosen by the dealer. In other words, the car is actually sold to the leasing company who, in turn, rents the car to you. The dealer simply acts as an agent for the leasing company and negotiates the terms under which you will rent the car from the leasing company. When you lease, you pay a significant amount of interest on the transaction. And there are tax and license fees. And all cars don't depreciate evenly. But still, the basic concept of leasing is that you pay for the depreciation of the car (Edgerton, 2001). Signing a leasing contract means that “you agree to make regular monthly payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and take good care of the vehicle” (Kay, 1997). Further, you agree that you'll keep the car for a specified number of months and you're expected to stick it out to the end. 20 Car Lease Selection with respect to Customer Preferences in Islamabad The lease sets out the contractual obligations of the two parties, what the leaseholder has contracted to do, and what the landlord is bound to do. Leaseholders are not necessarily entirely free to do whatever they want in or with the car. The first thing to understand is that leasing is not renting. When you lease a car, you are arranging for the vehicle to be sold to a leasing company, usually an arm of the manufacturer. The leasing company then lets you use it for a monthly fee over a set period of time. When the term of the lease is up, you have two options, you can either return the car to the dealer and walk away without paying anything else, or you can buy the car for a prearranged lump sum, which is known as the vehicle's "residual value." the number of factors that go into calculating the monthly payment is very complicated. When you lease a car, what you are paying for is the car's depreciation over the term of the contract, plus interest, taxes and fees (Sutton, 2001). Depreciation is the difference between the car's value today (the price) and what it will be worth at the end of the lease i.e., the prearranged residual value (Edgerton, 2001). As in a sale, the price (i.e., capitalized cost) is negotiable. It can be cut automatically with a down payment or a trade-in. You can also negotiate the upfront costs, such as the acquisition fee and security deposit, to get a better deal. Leasing a car is a great way to drive a new model car and be able to switch to a newer one every couple of years without the hassle of trying to sell your old car or trade it in. Leasing has become more popular lately and seems to continue growing in popularity. The lack of commitment to one car entices many people. Leasing also has the benefits of lower monthly payments than buying a car, a low up front cost, and a solid warranty that will cover you for the entire term of your lease. This will cut back 21 Car Lease Selection with respect to Customer Preferences in Islamabad on your maintenance costs. Even though leasing may have its benefits, it may not be for everyone. At the end of the lease you're expected to return your vehicle to the leasing company with no more than normal wear and tear. You'll have to pay for any damage or extra mileage over and above your contract-specified limits. You may have an option to purchase your vehicle at lease-end for a specified price, if you choose. Or you may be able to use the car as a trade-in on a new car. Otherwise, you can simply return the vehicle to the leasing company and walk away. However, because you might just have equity value in your vehicle that you don't want to simply give back to the leasing company. Leasing can be a tricky business. That’s why you need professional advice on the topic. The information in this section can be used by banks, dealerships and leasing companies to train their sales personnel and most importantly the customers, whether you’ve leased before or are new to the arena. Whether you are trying to analyze and compare leases or simply deciding whether to lease at all, going into the process without a fundamental grasp of the concepts will end up costing you money. Surprisingly few individuals who will either lease or seriously consider leasing, will enter into their transaction with a rock-solid understanding of how leasing works and whether it best suits their driving habits and financial preferences. Consumers may, of course, rely on the dealer to tell them that they really got a good deal. But, today with more educated shoppers most would rather make that judgment themselves. In order to do so, we must begin with an understanding of the idea behind leasing. 22 Car Lease Selection with respect to Customer Preferences in Islamabad A company generally has three options in financing capital assets: Leasing, Financing and Paying Cash (Aghili, 1998).In this study we will focus on what factors to consider while leasing and the benefits and disadvantages of leasing. Leasing may be the best long-term financing solution. By leasing, instead of paying cash up front, a company can free-up its capital for other purposes. For example, a company may need databases and high-speed on-line connections to manage information files on customer preferences, monitor the competition and emerging markets, and communicate with customers in an instant. Perhaps attractive new furnishings and functional equipments are required. All of this takes capital, and more of it will be affordable if lease financing is utilized. There may also be reductions in repair and maintenance expenses that come with newer equipment, plus the operational efficiencies that accrue when technology resources are acquired through a planned, rather than haphazard, program. Leasing may also reward you with Off-balance sheet financing, Payment amounts that are determined up front, Fully expensed lease payments, Potential tax benefits, Seasonal payment structures and Fixed-rate financing (Aghili, 1998). Bank financing preserves capital at the outset. But a company is still subject to the risk of technology and equipment obsolescence that comes with ownership plus a mountain of paperwork. Banks may also impose additional requirements or other covenants that narrow a company's financial options. Banks may be limited in what they can offer a company in the way of leasing if a company already has additional credit lines with them. Moreover, banks often 23 Car Lease Selection with respect to Customer Preferences in Islamabad require compensating balances, availability charges, non-usage fees, lien search fees and documentation fees. On the practical side, banks can't help a company when it runs into technological obsolescence, nor will they take existing equipment off your hands when you decide to upgrade. For a company to grow and prosper, it can't afford to be stuck with older equipment and technology. To maintain that competitive edge, a company needs the best that's available. Finally, consider that banks also shy away from some of the most important investments like licensed software, installation, training, maintenance and other "soft" costs. Paying cash, however, depletes a company's precious capital reserves, preventing it from allocating them to more important uses. And by paying cash in full at the outset, a company can only depreciate and write off a small percentage of the original cost each year. With something that changes as quickly as computer technology, a company may be saddled with outdated high technology assets before they're fully depreciated, potentially resulting in a book loss and a negative impact on profits. Leasing has many advantages. A new car every time may seem more fun than waiting for so many years. Leasing is a newer method of financing, where the "down payment" (Raisglid and Turner, 1998) is put at the back of the transaction. If you decide to keep the car, 24 Car Lease Selection with respect to Customer Preferences in Islamabad you must pay the residual value at the end. You are also charged sales tax and license on the residual amount. If you like the vehicle, you can refinance the residual, provided you have paid your account well and that your account is in good standing. You also need to have the ability to make payments if you elect to refinance the car at the end of the lease. People who benefit from leasing drive a reasonable number of miles per year. High-mileage drivers destroy the value of their vehicle faster than they can pay for it on a lease program. These motorists are generally better off purchasing the car. However, many people find they want a new car about 3 years after they acquire one. These people are ideally suited to leasing. Also, the warranty on the car will probably be close to the same length of time the lease is written for, giving you peace of mind. Leasing offers numerous advantages over other financing methods: (Raisglid and Turner, 1998) • Tax treatment. An operating lease is not considered to be a purchase, but rather a tax-deductible overhead expense. Therefore, you can deduct the lease payments from your corporate income. • Balance sheet management. Because an operating lease is not considered a longterm debt or liability, it does not appear as debt on your financial statement, thus making you more attractive to traditional lenders when you need them. • 100 percent financing. With leasing, there is very little money down - perhaps only the first and last month's payment are due at the time of the lease. Since a lease does not require a down payment, it is equivalent to 100 percent financing. 25 Car Lease Selection with respect to Customer Preferences in Islamabad That means that you will have more money to invest in revenue-generating activities. • Immediate write-off of the dollars spent. Leasing payments are treated as expenses on a company's balance sheet; therefore, equipment does not have to be depreciated over five to seven years. • Flexibility. As your business grows and your needs change, you can add or upgrade at any point during the lease term through add-on or master leases. If you anticipate growth, be sure to negotiate that option when you structure your lease program. You also have the option to include installation, maintenance and other services, if needed. • Customized solutions. A variety of leasing products is available, allowing you to tailor a program to fit your or year-to-year cash flow needs. You are able to customize a program to address your needs and requirements - cash flow, budget, transaction structure, cyclical fluctuations, etc. Some leases allow you, for example, to miss one or more payment without a penalty, an important feature for seasonal businesses. • Asset management. A lease provides the use of equipment for specific periods of time at fixed payments. The lessor assumes and manages the risk of equipment ownership. At the end of the lease, the lessor is responsible for the disposition of the asset. • Upgraded technology. If the nature of your industry demands that you have the latest technology, a short-term operating lease can help you get the equipment and keep your cash. Lease equipment that you expect to depreciate quickly. Your risk of getting caught with obsolete equipment is lower because you can upgrade or add equipment to meet your ever-changing needs. 26 Car Lease Selection with respect to Customer Preferences in Islamabad • Speed. Leasing can allow you to respond quickly to new opportunities with minimal documentation. Many leasing companies can approve your application within one or two days and you can have your equipment very quickly. • Improved cash forecasting. By leasing equipment you know the amount and number of lease payments over the life of the leasing period, so you can accurately forecast cash requirements for your equipment. • Flexible end of term options. There are several options for disposing of equipment after the lease term ends including returning the equipment, renewing the lease or purchasing the equipment. • Tax benefits. Lessors often pass the tax benefits of ownership on to the lessee in the form of lower monthly payments. • Improved earnings. Operating lease accounting provides a lower cost than a capital lease in the early years of a lease. Pros and cons of leasing versus buying: (MacPherson, 2001) Advantages of Leasing • • • • • Lower monthly payments Lower down payment You can drive a better car for less money each month At the end of the lease you can buy the car or just give it back, you decide. Lower repair costs (with a three-year lease, the factory warranty covers most repairs) • • • • You can drive a new car every two or three years No long time commitment worries. Warranties are for the span of time you have the care normally. No trade-in hassles at the end of the lease 27 Car Lease Selection with respect to Customer Preferences in Islamabad • You pay sales tax only on the portion of the car you finance Disadvantages of Leasing • • • You don't own the car at the end of the lease Your mileage is limited to a set amount, typically 10,000 to15, 000 a year Lease contracts are confusing, so it makes it difficult to ensure you're getting a fair deal • • • • • Leasing is more expensive in the long run You cannot alter the car. It cannot be modified or changed. Depreciating values of the car can end up costing you money Wear-and-tear charges can add up It's hard to terminate a lease early if your driving needs change Advantages of Buying • • • • Pride of ownership — you can do with your car as you please Car buying is more economical in the long run No mileage penalty Increased flexibility — you can sell the car whenever you want Disadvantages of Buying: • • • Higher down payment Higher monthly payments You're responsible for maintenance costs once the warranty expires (or have to buy an extended warranty) • Trade-in or selling hassles 28 Car Lease Selection with respect to Customer Preferences in Islamabad • Your money is tied up in a car, which depreciates, rather than an investment that appreciates. When you lease a vehicle, you have the right to: • • Use it for an agreed-upon number of months and miles. Turn it in at lease end, pay any end-of-lease fees and charges, and "walk away"(Flinn, 1990). • • Buy the vehicle if you have a purchase option. Take advantage of any warranties, recalls, or other services that apply to the vehicle. You may be responsible for: • Excess mileage charges when you return the vehicle. Your lease agreement will tell you how many miles you can drive before you must pay for extra miles and how much the per-mile charge will be. • Excess wear and tear when you return the vehicle. The standards for excess wear, such as for body damage or worn tires, are in your lease agreement. • Substantial payments if you end the lease early. The earlier you end the lease, the greater these charges are likely to be. Leasing Terms: Considering leasing one should be familiar with all the Leasing Terms such as, Money Factor, Residual, Cap Cost, Acquisition Fee, Disposition Fee and Monthly Depreciation Fee etc. (Bragg, 1999) 29 Car Lease Selection with respect to Customer Preferences in Islamabad 1. Money Factor: Money factor is a number that determines the monthly finance cost of a lease. In other words, it determines how much you pay for the "right" to lease this vehicle. Money factors are constant within a lease company, but playing off one leasing firm against another can negotiate them. 2. Residual Value: Residual value is a predetermined value of the lease vehicle at the end of the lease term. Again, this is a negotiable item, sometimes not within one leasing company, but between leasing concerns. 3. Capitalization Cost, Cap Cost: Cap Cost is the price at which the vehicle would be sold if the deal were for cash. A finance/leasing company purchases the car from the dealer for this price. It is negotiable and should always be fully negotiated. It should be clearly stated on the lease agreement and should be identical to what was negotiated before you mentioned that you wanted to lease. 4. Acquisition Fee: You would have heard the commercials saying "No Money Down just a monthly payment of a given low amount" Of course they don't tell you that you'll owe the first month and a security deposit when you sign the lease and you'll be obligated to pay an acquisition fee. Acquisition fee from time to time is folded into the cap cost of the vehicle, so you pay it as part of your monthly rental. 5. Disposition Fee: When you pay a disposition fee, you're paying the dealer to take your lease car away from you and "dispose" it off so they can take full advantage of the next uninformed consumer who walks in. Negotiate this out of your contract if at all 30 Car Lease Selection with respect to Customer Preferences in Islamabad possible. If not, at least be aware of this cost at lease signing. It's nothing more than a common lease ploy. The state attorneys general have exposed a lot of the fraud in the leasing end of the business, and have forced the manufacturers to list "out of pocket costs at signing" in advertising. It is perhaps for this reason that a lot of leasing contracts have eliminated the acquisition fee, and substituted this one, which doesn't show up until the end of the lease. 6. Depreciation fees: The wear and tear you inflict on the car while it is in your possession. Mathematically, it is the difference between the capitalized cost and the car's value at the end of the lease. 7. Down stroke - Everything you have to pay the day you sign the lease, including any down payment, fees and taxes. 8. Gap Coverage - Extra insurance the leasing company provides to cover you if your car is ever wrecked or stolen. The gap is the difference between how much it would cost to replace your car and the amount you would have to pay the leasing company to get out of your lease. 9. Invoice Price (Factory Invoice) - This is roughly what the dealer paid for the car. Use this number as a benchmark to figure out how much you should pay. 10. Manufacturer's Suggested Retail Price (MSRP). This is the sticker price. Nobody should pay even close to this much for a car. 11. Subsidies - Incentives or guarantees given to dealers, usually in order to boost a car's residual value and/or cut interest rates (and thus reduce your monthly payments). A lease with subsidies is also called a "sub vented" lease. 31 Car Lease Selection with respect to Customer Preferences in Islamabad 12. Walk Up - A classic sales strategy wherein a salesperson lures you with a low base price and then "walks up" the dealership's profit by selling you a lot of options. Types of Leases: Automobile leases come in two varieties: closed-end and open-end. There's a big difference between the two types and. Federal regulations require that the type of lease be clearly indicated on all lease contracts. (Brigham and Gapenski, 1997) 1. Closed-end leases Sometimes called "walk-away" (Bragg, 1999) leases, are most common for consumer leases today. This type of lease allows you to simply return your vehicle at the end of the lease and have no other responsibilities. At the time you lease, the leasing company estimates the vehicle's lease-end residual value and, if the vehicle is actually worth less than the residual when you turn it in, the leasing company takes the hit, not you. On the other hand, if the vehicle is worth more than the residual, and you have the option to purchase, you may want to buy it, then sell it and make a profit. This happens frequently. 2. Open-end leases: Open-end leases are used primarily for commercial business leasing. In this case the customer, take all the risks. You are responsible for paying any difference between the estimated lease-end value and the actual market value at the end of the lease. This could amount to a significant sum of money if the market value of your vehicle has dropped. 32 Car Lease Selection with respect to Customer Preferences in Islamabad It is recommended that you only agree to a closed-end consumer lease. Even though in most non-business leases your encounter will be of this type, read your contract closely just to be certain. Even if you hate math, you owe it to yourself to become intimately familiar with the method of calculating and analyzing monthly lease payments. The ability to understand and manipulate the numbers that make up your lease quote may be the most powerful tool in your bargaining arsenal. After all, you will never know if you have truly obtained the best deal possible if you know nothing about how the dealer arrived at the monthly payment he quoted. In this arena, knowledge is cash. Whichever method of calculation you choose, become acquainted with the four basic components of all vehicle lease payments (Bragg, 1999). • • • • Adjusted Capitalized Cost Residual Value (Get ALG residual values) Rent Charge or Money Factor (Get market money factors) Lease Term These items must be disclosed to you prior to lease signing. The trick is to ask for the disclosures well before you sit down to sign the lease. Bring the dealer’s disclosure sheet home and crank through the numbers to determine whether the offer proposed is satisfactory to you and whether he gave you all of the terms you thought you had bargained for during your visit. The residual value of a leased vehicle is the lessor's estimate of what the vehicle will be worth at the end of your lease term. Sometimes referred to as the lease-end value, the residual value is an important number to know for a couple of reasons. Your monthly lease payment is based on the difference between the adjusted 33 Car Lease Selection with respect to Customer Preferences in Islamabad capitalized cost and the residual value of the vehicle. For that reason, knowing your residual value is essential in determining your repayment liability. In addition, the residual value represents the minimum you should expect to pay if you elect to exercise your purchase option at lease end in a closed end lease. In an open-end lease, the residual value takes on even greater importance. Residual values will vary depending upon the particular model you choose, the lessor (i.e. bank, captive finance company or independent leasing company), the amount of miles you anticipate driving, and particular promotions being offered on that model. In all cases, the lessor sets the residual value. So, the best you can do is shop among different lessors for the most competitive number. You can expect variations among values offered by the captive finance companies, independent leasing companies, and banks. One way to shop residuals is to simply quiz the dealer’s finance manager to find out which lenders are offering aggressive residual values along with competitive rates There are times when you might not wish to have a high residual value. If you are planning to enter into an open-end lease, for example, you will be safer with a less aggressive residual value. In an open-end lease, you are liable for the difference between the predicted residual value and the actual amount received by the lessor on the sale or auction of your vehicle at lease end. If the open-end residual value is artificially inflated to reduce the monthly payments, the shark will show up at lease end when the actual market value of the vehicle is lower and you owe the difference. If you are seriously considering a lease-end purchase, you may also be a candidate for a lower residual value because that is typically the amount you will be expected to pay for the vehicle. Of course, you must balance that possible saving against higher monthly payments. A low residual value also makes good sense if you are leasing a 34 Car Lease Selection with respect to Customer Preferences in Islamabad vehicle for business purposes and you have the opportunity to purchase it for personal use at lease end. Provided the vehicle is actually being used for business, the higher monthly payments may be deducted as a business expense during the course of the lease, leaving a reasonable purchase option amount for you at lease end. Unless you fit into one of those categories, however, you will likely find yourself shopping for a high residual value in order to obtain the lowest monthly payment. Manufacturers are aware of this and often "push" the residual value in order to advertise and deliver lower monthly payments (Neard, 1996). High residual values offered by captive finance companies are often accompanied by low money factors. As taxing as it may be to your psyche, a discussion of taxes is just as important as other aspects of leasing (Jack R. Nerad and Jack Neard, 1996). There are essentially two methods of assessing sales tax in a lease transaction. The most popular method is to assess tax on the payments due under the lease (Neard, 1996). The second method imposes a tax on the entire capitalized cost of the vehicle, even though the lessee does not own the vehicle (Drenth, 2002). In theory, calculating your tax under either of these methods should not be difficult. Of course, in reality, this proves less than true. Each state has not only its own general method of calculating sales tax, but also a list of taxable and nontaxable components of a lease. For now, we will explore the fundamental methods of taxation. Most states use the “stream of payments” method to calculate sales tax under a lease. To figure out your tax liability under this method, just multiply your monthly payment by one plus the tax rate (Howell and Macmillan, 1998). 35 Car Lease Selection with respect to Customer Preferences in Islamabad In addition to tax on the monthly payment, you must also pay tax on any cash down payment made because this is effectively a “purchase down” (Howell and Macmillan, 1998) of the price of the vehicle and would not be captured in the monthly payment calculation. In some states you must also pay tax on any trade-in equity, which reduces your cap cost. Under the stream method you do pay tax on the rent charge portion of your monthly payment. With the stream of payments method, you actually pay less tax than does someone who leases the same vehicle in a state which taxes the full capitalized cost of the vehicle assuming you do not purchase the vehicle at lease end. Essentially, you are paying tax only on what you are using. Under the capitalized cost method of taxation, the lessee pays tax on the capitalized cost of the vehicle. In cap cost states the total tax is often due at the commencement of the lease, meaning the lessor must pay it and either collect it from you up front or roll it into your lease. In addition to your total purchase price or cash down payment and monthly lease payment, there are other taxable elements of your vehicle transaction. In some states, you will be taxed on the equity in your trade-in vehicle. On the other hand, there are several states that will not tax trade-ins provided that the parties agree to the value of the vehicle being traded. Other typical lease items subject to taxation include: (Neard, 1996) • • • Acquisition Fees License Fees Excess Mileage Charges 36 Car Lease Selection with respect to Customer Preferences in Islamabad • • • • • Excess Wear and Tear Charges Termination Fees Disposition Fees Collection and Repossession Fees Federal Luxury Tax If you understand early termination going in, you are more likely to plan a more sensible lease term and certainly less likely to be surprised if you change your mind later on. If you terminate early, at the very least you should expect to pay: (Bragg, 1999) • • • • a disposal fee if you return the car, any past-due payments, the remaining depreciation due under the lease (without interest), and An early termination penalty (in some leases). Against these charges, you should receive credit for any amount by which the actual or estimated wholesale value of the vehicle exceeds the residual value stated in your contract. Hidden Cost on Early Termination: The description above is useful for illustrating how early termination works if the value of your vehicle at termination is equal to or greater than its predicted residual value. It does not illustrate, however, the risk you bear on early termination if the value of your vehicle has dipped below the estimated residual value. 37 Car Lease Selection with respect to Customer Preferences in Islamabad Leasing can be a more comfortable experience when buyers have a more in depth knowledge of terms and conditions. Beginning, Middle, and End-Of-Lease Costs: • At the beginning of the lease, you may have to pay your first monthly payment; a refundable security deposit or your last monthly payment; other fees for licenses, registration, and title; a capitalized cost reduction (like a down payment); an acquisition fee (also called a processing or assignment fee); freight or destination charges; and state or local taxes. • During the lease, you will have to pay your monthly payment; any additional taxes not included in the payment such as sales, use, and personal property taxes; insurance premiums; ongoing maintenance costs; and any fees for late payment. You will also have to pay for safety and emissions inspections and any traffic tickets. If you end your lease early, you may have to pay substantial early termination charges. • At the end of the lease, if you do not buy the vehicle, you may have to pay a disposition fee and charges for excess miles and excess wear. Also, be aware that "Lease rates" (Sutton, 2001) or "money factors" (Sutton, 2001) do not have standardized definitions and are not equivalent to an APR. Unlike when you finance a car and the finance charge must be stated as an Annual Percentage Rate (APR), there is no similar requirement for disclosing the cost of leases. Dealers will always try to focus you on the monthly payment. There's a simple reason for this, if they can get you comfortable with a set, cheap-sounding number, 38 Car Lease Selection with respect to Customer Preferences in Islamabad they can manipulate the other variables i.e., the price, the interest rate, the residual value, or the term to boost their profit while keeping the payment where it is. As the purchaser, or owner, of a leasehold car, it is in your own interest to understand the legal nature of the ownership. What exactly do you own and what are the associated rights and liabilities. You need to understand what residential leasehold is, be clear on your rights, and appreciate what your responsibilities are. Car Buying Strategic Defense Initiatives are explained in three steps: (Sutton, 2001) Step 1: Negotiate the price of the new car Step 2: Value the trade-in vehicle Step 3: Arrange financing/leasing If you take a “deal” without doing the three distinct parts, then the lessor has succeeded in confusing you. You should be able to hold your own when calculating leases against the dealer's supercomputer. It lets the dealer handle the messy financing stuff for you. It is the most simplistic approach, and it will get the financing arrangement job done in short order. However, dealer-arranged financing is probably not in your best interest. Dealerships make a great deal of their money on what is known as Back End business. A portion of back end profit comes from arranging the financing for the vehicles that customers have purchased. Dealer agreements with financing institutions are often structured so that the higher interest rate a dealer can get you to accept, the more money they make off the deal. This portion of a dealer's business is summed up in just one word “lucrative”. 39 Car Lease Selection with respect to Customer Preferences in Islamabad After performing a little due diligence on the financing of your purchase, decide on one source. Negotiate the particulars down to the last detail, but don't commit. Another financial preparation many consumers fail to perform is the inevitable insurance question. Like most shoppers, you want to lease the car of your choice for the lowest possible price. Leasing is attractive because of low payments and the prospect of driving a new car every two or three years. The biggest mistake many customers make when leasing a car is to focus with their dealer's encouragement on that seemingly low monthly finance charge to the exclusion of all else. The monthly payment is, of course, crucial but before buying a car you would need to know the price and interest rates. The monthly payment is built on these crucial details. A dealer is required to disclose most of the key variables of a lease, including the monthly payments, the residual value and the length of the lease. It's worth noting, however, that a dealer does not have to disclose the interest rate. But having these numbers is really just the beginning. To figure out whether you're getting a good deal, you need to know how each of these figures compares in the open market. Leasing a car is complicated. It's also more expensive than it used to be. Just a few years ago, the best deals were heavily subsidized by the manufacturers, which made leasing downright cheap. Sadly, this practice is far less common today, which means that to get a good deal in the current environment you'll need to be savvier than ever. You also need to be aggressive. For example, one way to knock down your out40 Car Lease Selection with respect to Customer Preferences in Islamabad of-pocket costs is to demand that the dealer waive the upfront costs such as the acquisition fee, security deposit and processing fee etc. Most people don't realize that nearly everything about a lease is negotiable. Of course, to be an effective negotiator, you need key information about the marketplace. Pricing Data: Once you know what type of car you're interested in, it's crucial to have a rough understanding of your opponent's bottom line. After all, if you don't know how low a car dealer can go, how are you going to know when to push for a better price? Your first step should be to find the car's invoice price. Also known as the factory invoice, this number is essentially what the dealer paid for the car. Your lease will be based on "the capitalized cost," a price you negotiate somewhere between the invoice price and the MSRP. The MSRP is the "manufacturer's suggested retail price"(PanAmSat Reports first Quarter 2000 Financial Results, 2000). In some cases you can get a dealer to accept only a few hundred dollars above the invoice. Sometimes cash incentives from the manufacturer even make it possible for dealers to sell cars for less than the invoice price. Not all car dealers are out to get you. There are many, of course, who would just like to help you find the car you need. But you can count on your dealer trying to squeeze as much out of you as possible is the salesperson's job. And when it comes to leasing, aggressive sales tactics all too often range dangerously close to abuse and fraud. Most states have laws against unfair and deceptive sales practices to protect against such things. But that doesn't mean they don't happen. 41 Car Lease Selection with respect to Customer Preferences in Islamabad If you understand the process and pay attention to the numbers on the disclosure statement you can avoid many dealer scams. But here are some watch outs: The most important thing to be aware of is a dealer playing with your contract numbers after the negotiation. This will not be as easy to do with the new required disclosure statement, but it's up to you to keep an eye on the numbers. You may have thought you'd negotiated a great price and interest rates, in addition to an affordable monthly payment, only to find those numbers have changed when the final contract was drafted. The monthly payment may look the same, but other numbers have been rigged to swing the deal in the dealer's favor. The problem is, leasing is so confusing that most people can't do their own math. A salesperson will sit you down in front of a blank piece of paper divided into four quadrants. In each quadrant he'll fill in values for the price, the trade-in value, the down payment and the monthly lease rate. The salesperson will then negotiate the four factors separately, crossing out numbers and writing in new ones until the customer is hopelessly confused. The problem is, each of these factors is used to build the monthly payment. By definition, therefore, they can't be negotiated separately from it. In the end, you think you've cut a great deal on the price and trade-in, when in fact, all you've done is told the dealer what monthly payment you'll put up with. Pay attention to the other numbers used in calculating the monthly payment — the salesperson may manipulate them to jack up the car's price. A common complaint heard into a car dealership fully intending to buy a car, only to be switched at the last minute into a lease deal, sometimes without even knowing it. The scam is that the dealer promises a lease payment that is the same or 42 Car Lease Selection with respect to Customer Preferences in Islamabad somewhat lower than a monthly loan payment on the same car and the problem is because a lessor is only paying for two or three year's use of the car, the monthly payment should be much lower on a lease (Current and Archived Press Releases, 2002). Some leasing customers lose substantial value on their trade-ins. The dealer is now required to disclose the capitalized cost reduction used in calculating your monthly payment. That includes credit for a rebate or trade-in and down payment. Ask your dealer to break down the number for you so you can see how much you're getting for your old car. Keep in mind that you will usually get a better price if you separate the sale of your old car from the lease deal. This time-worn retail scam is prevalent in leasing. Car dealers run an advertisement quoting an attractive lease rate and then try to get you into a more expensive deal any way they can. Maybe the fine print on the deal has terms that make it unattractive. Many dealers will claim they've already sold all the cars described in the promotion offer and end up showing you a "slightly more expensive" (Kay, 1997) model. This practice violates many states' laws against deceptive advertising. Other times, the advertised car is a bare bones model onto which the dealer tries to pack numerous options that inflate the monthly payment like a balloon. Car dealers have always done this. They'll let pressure and anxiety build over time to wear down a customer's resolve. After hours in a showroom, some customers will cave in to high-pressure tactics just to be "allowed" to leave (Flinn, 1990). Some dealers will even pretend to "lose"(Raisglid and Turner, 1998) a customer's car keys 43 Car Lease Selection with respect to Customer Preferences in Islamabad obtained while the customer was test-driving a new car just to keep the target in the dealership longer so the salesperson can apply more pressure. If you purchase or lease a car and then discover that it has defects that substantially affect its safety, use or value, state law may help you gain satisfaction from the vehicle's manufacturer. While the law cannot help everyone with a "lemon" (a problem car) (Akerlof, 1970), and some people may have to hire an attorney to get their cases resolved, the law does create important rights for car buyers. This brochure provides basic information about how the law helps people get their cars repaired or replaced under warranty. (A warranty is a written guarantee that the vehicle is of good, sound quality.) If your vehicle is determined to be a lemon, you have the right to choose a refund instead of a replacement vehicle. You cannot be required by the manufacturer to accept a replacement vehicle instead of a refund. In addition, you may be able to get a refund for repair, towing and use of a rental vehicle. The Warranty Act also applies to used vehicles that are still under a manufacturer's new car warranty. When a used car covered by a new car warranty is sold, any remaining time left in the warranty protects the car's new owner. The law covers "certified" (Akerlof, 1970) used cars (autos with quality guarantees sold by dealers or through manufacturers' programs), resold lemons (defective vehicles that are bought back by manufacturers or dealers and then resold) and autos covered by extended service contracts. 44 Car Lease Selection with respect to Customer Preferences in Islamabad Any defect or condition that substantially impairs the use, value or safety of your vehicle under warranty, and that you have tried to have repaired by an authorized dealer, entitles you to seek a refund or replacement under the Lemon Law, even if the manufacturer continues to say it cannot find a problem. The law recognizes that if you purchased a new or quality guaranteed vehicle, you have the right to rely on its dependability and safety. Just as an accused person is "presumed" (Akerlof, 1970) innocent until proven guilty, you can presume that a new vehicle under warranty is a lemon if you can show that there have been numerous unsuccessful attempts to repair it, or that the problem cannot be repaired. Concluding Advice: The customer should check out different leasing options before joining the lease agreement. Here is a list of negotiable items (Edgerton, 2001). • The agreed-upon value of the vehicle (A lower value can reduce your monthly payment) • • • • • • • Up-front payments, including the capitalized cost reduction The length of the lease The monthly lease payment Any end-of-lease fees and charges The mileage allowed and per-mile charges for excess miles The option to purchase either at lease end or earlier Whether your lease includes "gap" (Sutton, 2001) coverage, which protects you if the vehicle is stolen or destroyed in an accident. 45 Car Lease Selection with respect to Customer Preferences in Islamabad • • Advertised specials and other lease offerings. Look for sub vented lease deals. Leases that are subsidized by manufacturers are often good bargains. High residual values are usually the hallmarks of sub vented deals. Often, high residuals are accompanied by reduced money factors, making the deal a double win for you. • Get market money factors and residuals to compare to the dealer’s offers. Remember, the dealer will offer you one of many programs provided to him by major lenders and captive finance companies. Arm yourself with information about the market before you begin negotiating so you’ll know whether the dealer’s offer is a fair market offer. • Don’t play games if you intend to lease -- tell the dealer you are interested in leasing and open the negotiations with the cap cost. Use pricing guides to help you in evaluating the proposed cap cost including selected options. • Add gap insurance to your lease if it is not already provided. That way, if your vehicle is stolen or totaled before the end of your lease, you will not be stuck paying the early termination balance (something your ordinary insurance will not cover). The cost of gap protection should be no more than a couple hundred dollars and often it is included in the lease rate. Read your gap insurance clause carefully. Some contracts require your insurance company to “fully honor” your claim before the lessor becomes liable for the “gap” (Sutton, 2001) in coverage. You should ask your lessor what this means exactly so you don’t get left holding the bag in the event of a total loss. • Generally, avoid making a down payment on a lease. One of the primary benefits of a lease is that it allows you to avoid making a significant, up-front cash outlay. If you have better uses for the money or you can invest the money and earn more 46 Car Lease Selection with respect to Customer Preferences in Islamabad than what you save in rent charges by paying the money to the lessor, the money is better off in your account. • If you are trading in a vehicle, make sure you are getting the proper credit for your trade-in. Since leases are based on the difference between the negotiated purchase price and the residual value (a much smaller number than the purchase price), reductions in the cap cost from trade-in's with equity result in magnified savings on your lease payment. • Know the basic elements of your lease: Cap cost, rent charge or money factor, residual value and term. • Consumers should generally avoid open-end leases. If you do sign one, it means that you, and not the lessor, will be liable for the difference between the estimated residual value and the actual value of the vehicle at lease end. Although Regulation M creates a presumption that any difference which exceeds three monthly payments under the lease is unreasonable, if the difference is due to your excessive wear or use of the vehicle, you may be liable for an amount that exceeds the three-payment limit. Some lessors would contend that open-end leases are just as safe for consumers as closed-end leases because you are effectively liable for depreciation on a closed-end lease in the form of excess mileage and wear. While this may be true, an open-end lease cannot cover you in the event of severe market depreciation or a simple mistake on estimating residual value. • Do not be pressured into signing a lease or purchase agreement on your first visit. Shop around and run the numbers. You will be amazed at the money you'll save. Use pricing guides and pricing services to help you uncover invoice prices, rebate programs and other dealer incentives which can translate into lower prices for you. 47 Car Lease Selection with respect to Customer Preferences in Islamabad • If you expect to pile on the miles, be sure to find out how much it costs to “buy” (MacPherson, 2001) extra miles up front. You’ll be surprised at how cheaply you can buy extra miles. In some cases you pay less up front for extra miles than the per mile depreciation actually caused by your driving those extra miles. In those cases, you win and the lessor pays. • • Know your lease-end charges like disposition and purchase option fees. Know your early termination options. When can you terminate (if at all) and how much will it cost you? • Generally avoid leasing a vehicle for a term that exceeds the manufacturer's warranty unless you are prepared to pay for repairs to a vehicle you do not own. In addition, the economics of a shorter term lease tend to be more favorable. • Know the minimum insurance coverage required by the lease and shop the premiums. • Leases are better on vehicles that are predicted to hold their value over the term of the lease. Remember, the higher the residual value, the lower the monthly payment. Generally, new models have higher predicted residual values at the beginning of their design cycle. Consult ALG residual values guide to get an idea of what the baseline is for the model you are considering. • Take good care of your leased vehicle by following maintenance instructions in the owner’s manual and have it cleaned and waxed regularly (even if you have to pay someone to do it!). Your vehicle will be inspected after you return it and you will be liable for any damage to the vehicle beyond ordinary wear and tear. If you are worried about being tagged with an excess wear charge, take you vehicle to an appraiser or a repair shop and find out how much it will cost to fix the damage. You are usually better off making the repairs yourself rather than having the lessor 48 Car Lease Selection with respect to Customer Preferences in Islamabad find the damage and charge you. Whatever you do, make sure your vehicle is clean when you turn it in. The lessor’s appraisers are human, and a clean, freshly waxed vehicle gives the impression that you were kind to it during the lease term, which enhances the likelihood that the appraiser will "overlook" minor items that the lessor might otherwise claim as damage beyond ordinary wear and tear. In the end, your best bet is to treat your car like it belongs to a friend. 49 Car Lease Selection with respect to Customer Preferences in Islamabad CHAPTER 3 50 Car Lease Selection with respect to Customer Preferences in Islamabad 3.1 TYPE OF STUDY 51 Car Lease Selection with respect to Customer Preferences in Islamabad 3. METHODOLOGY OF STUDY 3.1. TYPE OF STUDY This study is of descriptive type. It is undertaken to ascertain and be able to describe the characteristics of the variables of interest in this situation. The study is undertaken to find out the customer’s preferences of car leasing and what factors affect their choice in making the purchase decision. The goal of the study is to describe relevant aspects of the phenomena of interest to the researcher from an individual’s perspective. Descriptive study that presents the data in a meaningful form thus help to understand the characteristics of a group in a given situation, to think systematically about aspects in a given situation and to offer ideas for further probing to make certain simple decisions. 52 Car Lease Selection with respect to Customer Preferences in Islamabad 3.2 SOURCE OF INFORMATION 53 Car Lease Selection with respect to Customer Preferences in Islamabad 3.2. SOURCE OF INFORMATION The source of information included filling out questionnaires to find out the views of customers. It also included formal/ written information from websites and the forms as well as assistance from our professor and any concerned persons. Both field and desk research will be conducted to compile this study. Sources of desk research include: • • • • Newspapers and journals Magazines Books The Internet 54 Car Lease Selection with respect to Customer Preferences in Islamabad 3.3 RESPONDENTS OF THE STUDY 55 Car Lease Selection with respect to Customer Preferences in Islamabad 3.3. RESPONDENTS OF THE STUDY The respondents of the study were the present or past customers i.e. anyone who has an experience of leasing a car. Distinctions were made among the population on the basis of their income group and their purchasing power to find out what income group customers prefer what type of leases. 56 Car Lease Selection with respect to Customer Preferences in Islamabad 3.4 SAMPLING PROCEDURE 57 Car Lease Selection with respect to Customer Preferences in Islamabad 3.4. SAMPLING PROCEDURE Despite the errors associated with sampling, samples had to be created from a colossal population of respondents. The samples were taken from the population on the basis of simple random sampling. Needless to say, even if the intent of this study were to examine every element of the population; time, cost and human resource constraints had made it very hard to collect data, or test, or examine every element. Sample Size: The sample size was randomly taken from the population available with ease. The sample size was approximately of 100 respondents. Out of the 100 respondents 50 questionnaires were filled by lower income group and 50 by a higher income group of people. Survey Questions: The survey questions were in English for all respondents. 58 Car Lease Selection with respect to Customer Preferences in Islamabad 3.5 TREATMENT OF THE DATA 59 Car Lease Selection with respect to Customer Preferences in Islamabad 3.5. TREATMENT OF THE DATA To facilitate this study, descriptive research instruments were utilized that included questionnaires for the Primary Research purpose. • Questionnaires: There is one questionnaire for users of lease or anyone who is willing to lease. The questionnaire consists of descriptive style questions. The questionnaire contains 17 questions. The language has been kept formal and business-like. However, jargon has been purposely avoided to ease the filling-out process for ease of respondents in filling out the questionnaires. 60 Car Lease Selection with respect to Customer Preferences in Islamabad 3.6 STATISTICAL TOOLS 61 Car Lease Selection with respect to Customer Preferences in Islamabad 3.6. STATISTICAL TOOLS The questionnaires contain questions of descriptive type. For all questions I have used Nominal Scales to compute numbers and percentages of respondents for frequency distribution in order to qualitatively distinguish the groups. This scale will determine the percentage of respondents that have different variables involved and any other statistical tools aimed at collecting information and profile data of respondents like their income group or their purchasing power, and the perception of the respondents about the purchasing power that influence their decision making in purchasing the kind of lease that best suits them. Use of leasing as a tool for determining customer preferences - descriptive analytical statistics such as frequency distribution, pie charts, etc. Overall, descriptive statistics tool has been applied to interpret the data that will be collected through interviews and questionnaires. The questionnaires are almost purely descriptive, and the responses have been incorporated into the analyses. 62 Car Lease Selection with respect to Customer Preferences in Islamabad CHAPTER 4 63 Car Lease Selection with respect to Customer Preferences in Islamabad 4.1 DATA FINDING 64 Car Lease Selection with respect to Customer Preferences in Islamabad 4.1. DATA FINDINGS 1. Income Group 2. Willingness to spend Between 20,000 - 60,000 Between 5,000 to 10,000 f Yes 3. Monthly Payments 4. Projected Value 5. Service Factor 6. Lease Tenure 7. Interest Rate 8. Depreciation of New Car 9. Depreciation of Used Car 10. Capital or Operating Lease decision 11.1.Capital 11.2.Operating 12. Terms & Conditions Knowledge 13. Underdeveloped country’s risk for buying 2nd hand cars 14. Disposal Fee for Early Termination 15. Past Due payments for Early Termination 16. Remaining Depreciation for Early Termination 17. Early Termination Penalty 44 38 16 24 40 12 12 0 50 0 40 24 f No 6 12 34 26 10 38 38 50 0 50 10 26 % Yes 88% 76% 32% 48% 80% 24% 24% 0% 100% 0% 80% 48% % No 12% 24% 68% 52% 20% 76% 76% 100% 0% 100% 20% 52% Rank Order 1 1 2 2 1 2 2 2 1 2 1 2 Above 60,000 Above 10,000 f Yes 22 44 44 16 40 36 10 0 50 0 30 40 f No 28 6 6 34 10 14 40 50 0 50 20 10 % Yes 44% 88% 88% 32% 80% 72% 20% 0% 100% 0% 60% 80% % No 56% 12% 12% 68% 20% 28% 80% 100% 0% 100% 40% 20% Rank Orde r 2 1 1 2 1 1 2 2 1 2 1 1 26 16 24 34 52% 32% 48% 68% 1 2 22 20 28 30 44% 40% 56% 60% 2 2 16 34 32% 68% 2 18 32 36% 64% 2 28 22 56% 44% 1 26 24 52% 48% 1 65 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2 PIE CHARTS 66 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2. PIE CHARTS 4.2.1. Income Group Low Incom e Gp. Hight Incom e Gp. None of the Leasing customers lie in the Below 20,000 income group. The income group from 20,000-60,000 is classified as a lower and above 60,000 as a higher income group. A total sample of 100 was chosen out of which 50 were lower and 50 were higher income group respondents. We observed the responses of different income group to see how it affects the customer purchase behavior with respect to their purchase power. 4.2.2. Spending Power Rs. 5000 - 10000 Low Incom e Gp. Hight Incom e Gp. Rs. 10000 and Above In the lower income group the respondents are willing to spend between 5,000 to 10,000. While in the higher income group consists of respondents willing to spend between above 10,000. 67 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2.3. Monthly Payment’s importance with respect to purchasing power Income Group between 20000- 60000 22% 44% 66% Income Group Above 60000 Ye s No Yes No 88% Monthly payments has a more importance in a lower income group due to their preference of lower monthly payments that suits their income. While in the higher income group it is given some weightage but not as much as the lower income group respondents did. 4.2.4. Projected Value’s importance with respect to purchasing power Income Group between 20000- 60000 24% Income Group Above 60000 12% Ye s No 76% Yes No 88% Projected value has a relatively higher weightage in higher income group, but even in the lower income group, 76% respondents considered it importance which a huge percentage of respondents who give considerable importance to the variable. 68 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2.5. Service’s importance with respect to purchasing power Income Group between 20000- 60000 32% Yes No 68% 88% Yes No Income Group Above 60000 12% Higher income group give a lot of importance to service as compared to the lower income group people. They may be willing to pay more for services. While a lower income group prefers paying a lower amount, even if they do not get better service, 32% of the respondents, however, do give importance to the service factor. 4.2.6. Lease Tenure’s importance with respect to purchasing power Income Group between 20000- 60000 Income Group Above 60000 32% 52% 48% Yes No 68% Yes No Lease tenure does not seem to have too much importance. 48% of lower income and 30% of higher income group do find it important, but the variable does not seem significantly important. 69 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2.7. Interest Rate’s importance with respect to purchasing power Income Group between 20000- 60000 20% Income Group Above 60000 20% Yes No Yes No 80% 80% Interest rate is important for both income groups. 80% respondents of both income groups consider it an important variable. 4.2.8. Depreciation’s importance in leasing a new car Income Group between 20000- 60000 24% Income Group Above 60000 28% Yes No 76% 72% Yes No Importance for depreciation of a new car does not seem very important for low income group respondents, while 70% of the higher income group respondents marked it important. 4.2.9. Depreciation’s importance in leasing a used car Income Group between 20000- 60000 24% Income Group Above 60000 20% Yes No 76% Yes No 80% 70 Car Lease Selection with respect to Customer Preferences in Islamabad Importance for depreciation of old car is not considered very important by most respondents in either of the income group. 4.2.10. Capital or Operating Lease Decision with respect to purchase power Income Group between 20000- 60000 0% Income Group Above 60000 0% Yes No Yes No 100% 100% Purchase power does not influence the decision for capital or operating lease. It is an option that anyone can avail and is not influenced by the purchase power or income group. 4.2.11.1. Capital Lease Preference with respect to purchase power Income Group between 20000- 60000 0% Income Group Above 60000 0% Yes No Yes No 100% 100% All respondents have a preference for capital lease since they would prefer keeping the vehicle at the end of the lease period. 71 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2.11.2. Operating Lease Preference with respect to purchase power Income Group between 20000- 60000 0% Income Group Above 60000 0% Yes No Yes No 100% 100% None of the respondents wanted to let go the option for keeping the vehicle at the end of the lease. 4.2.12. Knowledge of Term’s and Condition’s influence in lease selection preference Income Group between 20000- 60000 20% 40% Income Group Above 60000 Yes No Yes 60% No 80% Majority of the respondents gave importance to the influence of knowledge of terms and conditions in their purchase behavior. Although the percentage is more for the lower income group. 4.2.13. Influence of risk of buying second hand car’s in underdeveloped country on your purchase decision Income Group between 20000- 60000 Income Group Above 60000 20% 52% 48% Yes No Yes No 80% 72 Car Lease Selection with respect to Customer Preferences in Islamabad Higher income group respondent give more weightage to the underdeveloped country’s risk in Pakistan for buying second hand cars than the lower income group respondents. 4.2.14. Disposal Fee’s influence with respect to Early Termination option in future Income Group between 20000- 60000 Income Group Above 60000 48% 52% Yes No 56% 44% Yes No Although the higher income group has also given weightage to the above variable, majority of the lower income group find the disposal fees important with respect to the early termination option in future. 4.2.15. Past Due Payments influence with respect to Early Termination option in future Income Group between 20000- 60000 32% Yes No 68% 60% 40% Yes No Income Group Above 60000 Very few respondents in both the income groups found the past due payments influence important with respect to the Early Termination option in future. 73 Car Lease Selection with respect to Customer Preferences in Islamabad 4.2.16. Remaining Depreciation’s influence with respect to Early Termination option in future Income Group between 20000- 60000 32% Yes No 68% 64% Income Group Above 60000 36% Yes No Remaining depreciation does not seem to be a very important variable, although 32% of the lower income and 36% of the higher income group respondents rate it important, the variable does not seem to have significant importance in either group. The percentage is almost the same for both income groups. 4.2.17 Early Termination Penalty’s influence with respect to Early Termination option in future Income Group between 20000- 60000 Income Group Above 60000 44% 56% Yes No 48% 52% Yes No Most respondents of both income groups consider great influence of the early termination penalty’s on the early termination option in future. 74 Car Lease Selection with respect to Customer Preferences in Islamabad CHAPTER 5 75 Car Lease Selection with respect to Customer Preferences in Islamabad 5.1 CONCLUSION 76 Car Lease Selection with respect to Customer Preferences in Islamabad 5.1 CONCLUSION The study was conducted mainly to find out the customer preferences, i.e., what variables they give more importance to and the importance of those factors associated with their income groups. Two groups of high and lower income groups were selected. The following variables for Low Income group are given measurable importance: • • • Monthly Payments Projected Value Interest Rate For the Higher Income group respondents, more importance was given to the following variables: • • • Projected Value Service Factor Interest Rate Depreciation of car does not have much importance in low income group respondents. But the higher income group respondents give more importance to new car’s depreciation for their decision making in purchasing a new car. In choosing capital or operating lease, purchase power does not have an influence. All respondents prefer capital lease over the operating i.e., they would all prefer to keep the vehicle at the end of the lease period by paying a small lump sump amount. 77 Car Lease Selection with respect to Customer Preferences in Islamabad 80% respondents of lower income group consider knowledge of terms and condition an importance factor. While 60% of the higher income group respondents also consider it an important factor. Most of the higher income group respondents find the risk of buying second hand cars in Pakistan (being an underdeveloped country) more compared to the lower income group respondents. With respect to the Early Termination Option in Future respondents of both income groups ranked the factors in the same manner given below: 1. Early Termination Penalty 2. Disposal Fee 3. Past Due Payments 4. Remaining Depreciation The purpose is to find out the importance of variable and to review the literature of experts. This will help the leasing customers evaluate themselves in a better way, and focus on the factors they have not given importance to. 78 Car Lease Selection with respect to Customer Preferences in Islamabad 5.2 RECOMMENDATIONS 79 Car Lease Selection with respect to Customer Preferences in Islamabad 5.2 RECOMMENDATIONS Based on the findings from the respondents the study concludes and recommends the high and low income group customers of car leasing on what variables to focus on. The study recommends the Lower income group respondents to focus on Monthly Payments, Projected Value and Interest Rate for their car leasing. They are also suggested to choose Capital Lease. The lower income group customers should also get a clear understanding of the terms and conditions of the car before they lease the vehicle. With respect to the Early Termination Option, they customers are recommended to focus on the Disposal Fee and the Early Termination Penalty that would be imposed on them for terminating the lease ahead of time. The Higher income group customers are recommended to give more importance to the Projected Value, Service Factor and the Interest Rate factor. They should also give importance to the Depreciation of a new car. The higher income group customers are recommended for capital lease and to clearly understand the terms and conditions before they lease the vehicle. They should also give measurable importance to the risk (for an underdeveloped country) of buying second hand cars before they lease a second hand vehicle. With respect to the Early Termination Option the higher income group customers are recommended to focus more on the Early Termination Penalty. The leasing firms are also recommended to give measurable importance to the variables based on the two income groups mentioned above. 80 Car Lease Selection with respect to Customer Preferences in Islamabad BIBLIOGRAPHY 81 Car Lease Selection with respect to Customer Preferences in Islamabad BIBLIOGRAPHY Report by an Organization 1. PanAmSat Reports first Quarter 2000 Financial Results, Greenwich, Conn., April 11, 2000 -- PanAmSat Corporation Journal 1. Akerlof. G, 1970, “Market For Lemons”, Quarterly Journal of Economics 84, 3, pp. 488-500 2. Current and Archived Press Releases, XTRA Lease Selects Pivotal for Sales and Marketing -Vancouver, BC - August 13, 2002 Referred Books Financial Statement Analysis by Lepold A. Bernstein and John J. Wild, Sixth Edition, 2000 1. Don't Get Taken Every Time - The Ultimate Guide to Buying or Leasing a Car in the Showroom or on the Internet-7th ed, Remar Sutton, April 2001 2. Car Buyer's and Leaser's Negotiating Bible-2nd ed, William James Bragg, January 1999 3. What Car Dealers Won't Tell You - The Insider's Guide to Buying and Leasing a New or Used Car, Bob Elliston, September 1996 82 Car Lease Selection with respect to Customer Preferences in Islamabad 4. Car Shopping Made Easy - Buying or Leasing, New or Used: How to Get the Car You Want at The Price You Want to Pay, Jerry Edgerton, September 2001 5. The Complete Idiot's Guide to Buying or Leasing a Car, Jack R. Nerad, Jack Neard, October 1996 6. Buying or Leasing a Car, Jim MacPherson, October 2001 7. The No-Nonsense Credit Manual - How to Repair Your Credit Profile, Manage Personal Debts and Get the Right Home Loan or Car Lease-1st ed, Shaun Aghili, February 1998 8. Buying and Leasing Cars on the Internet-1st ed., Ron Raisglid, Cheri Turner, November 1998 9. Don't Get Taken Every Time: The Insider's Guide to Buying or Leasing Your Next Car or Truck, Remar Sutton, August 1997 10. How to Save Big Money when You Lease a Car, Michael Flinn, April 1990 11. The Unofficial Guide to Buying or Leasing a Car, Donna Howell, Macmillan, July 1998 12. Car Shopping Made Easy - Buying or Leasing, New or Used-1st ed, Jerry Edgerton, February 1997 83 Car Lease Selection with respect to Customer Preferences in Islamabad 13. Buying and Leasing a Car - All Steps You Need to Know to Get the Car You Want, Tere Drenth, June 2002 14. Don't Get Taken Every Time - The Insider's Guide to Buying or Leasing Your Next Car or Truck-3rd ed, Remar Sutton, August 1994 15. Lease Your Car for Less: A Consumer's Guide to Vehicle Leasing-3rd ed, Richard L. Kay, April 1997 16. Financial Management by Eugene E. Brigham and Louis C. Gapenski, Eighth Edition, 1997 – Dryden 84 Car Lease Selection with respect to Customer Preferences in Islamabad APPENDIX 85 Car Lease Selection with respect to Customer Preferences in Islamabad QUESTIONNAIRE 86