Economic Choice and Decision Making

Economic Choice & Economic Decision Making

ECO 561

August 8, 2016

Economic Choice & Economic Decision Making

The ability to own a car is a significant milestone in a given individual's life.  There is a consensus that it is one of a few points of life that provides a measure of success.  Because of the importance of such an event, it is critical for any consumer to make a well-informed decision on what vehicle to purchase.  Economics is the science of the factors that are considered and their influence in the decision-making process.  This paper will focus on the author's decision-making process as a consumer in purchasing a new vehicle and determining the influences from the surrounding environment in the choices made by the author.  This will be analyzed based on a few factors including the role of interest rates, the cost of financing, gasoline prices, financial trade-offs, and the existing economic environment.

When I first decided upon purchasing a car, there were a few questions to answer.  Is having a car necessary?  Does it make more sense to drive or take public transportation?  What will be my budget?  What type of car should I buy?  How will I use my car?  Without these questions, the purpose of the purchase of a vehicle is defeated, because there are consequences to every decision, whether right or wrong.  The absence of analysis will result in future complications, such as financial limitations, that could have been anticipated.

There are few different methods available to acquire a new vehicle.  They include buying the car outright with cash, leasing the vehicle on a month-to-month basis, or financing the vehicle as a loan for the purchase.  The method chosen can be influenced based on existing interest rates and the cost associated with financing a vehicle.  The decision of which option to choice is related to demographical correlations based on race, societal class, job, and family (Fan & Burton, 2005).  Also, the cost of financing and interest rates have an influence on what method is chosen. Buying a car with cash allows the owner to be able to own the vehicle without any strings attached.  However, putting together the necessary capital to pay upfront is no easy task.  Leasing can be viewed as renting the car, as you would an apartment, and pay a monthly fee based on the signed lease.  Financing is the third option where the potential owner is buying the car, but money is loaned to help make the payments over a period.

Interest rates are factored into the payments made with the latter two options.  There are a few things factored into when calculating interest rates including credit scores and place of residence.  These interest rates can be distributed via banks or credit unions (Holbrook, n.d.).  Due to the number of possible providers, it is necessary to do research to obtain the best rate possible as these rates differ from provider to provider.  I was able to orchestrate a deal in 2013 where I did not have any interest rates associated with my monthly payments as well as removing any external fees that would have typically part of a lease agreement.  During that time, interest rates related to vehicle purchases was much lower compared to the past years despite the rise in prices with student loans and mortgages.  According to Palermo (2013), the interest rates had reached as low as 1.9% per individuals with good credit.  Due to the low rates, have interest factored into payments was a small difference, where the amount of interest can be counteracted by adjusting personal budgets.  Similar interest rates would have been attributed to financing a car; however, I did not want to be committed to paying those rates for a vehicle as it got older.