INTRODUCTION
Purchase decisions are important and difficult to make. The decisions mostly depend on the financial status of a person. Consumers use a lot of factors in determining the type of purchases they need to make. The factors are, however, insignificant to impulse shoppers who look to purchase whatever they find is enticing to their eye. Interest rates are very important when deciding the type of purchase is going to be made. They influence the overall cost of a good in the long run. It is, thus, important for consumers to understand the fluctuations in the interest rates to know the best appropriate time to make a purchase that involves a huge sum of money likely to be affected by the interest rates (Simon, 2009).
The paper will be looking at different factors that affect the purchase decisions involving huge sums of money for a consumer.
ANALYSIS
Role of the Interest Rate and the Cost of Financing on Purchase Decision
Interest rates play a vital role in a purchase that requires a huge cost of financing. In my purchase decision, high interest rates stopped my purchase for a period of 7 months. During that period, the interest rates would lead high cost of financing in the long run. During the purchase, the monthly interest rates stood at 2.74% which were to be completed within 46 months. The rates had dropped significantly from 4.31% which represented that I was supposed to pay a higher price. During the purchase, the interest rates were beginning to rise after hitting a year low. Low interest rates encourage huge purchases since they lead to a reduced cost of financing. Financing a moto vehicle requires a lot of money which a person might not be able to avail readily. Avoiding such a stress involves the use of financial institutions which look to provide auto-loans at a percentage of interest. In the long term, the auto-loan providers gain benefits in terms of profits (Deppe, Schwindt, Kugel, Plassmann, & Kenning, 2005).
Effect of gasoline prices in the choice of vehicle purchase
Different vehicles have different consumption capacity of gasoline. In my purchase, I had to consider the degree of consumption of the vehicle. During the purchase, the gasoline prices were relatively low. Due to this fact, I decided to purchase a heavy SUV with a small engine capacity since I saw it manageable. Other SUV’s such as the Range Rover Evoque consume much more fuel than the Audi Q7. The gasoline price was thus a vital factor during the purchase since in the long run; maintenance can be unaffordable since a person. During my purchase, the gasoline prices were dropping due to the oversupply of crude oil in the market. The inflated market led to a drop in prices dramatically till a point where there was an equilibrium price and quantity supplied (Lerner, Small & Loewenstein, 2004).
Employment and economic growth factor
Employment is an important factor in determining the purchase power of a person. For example, a person cannot manage to buy a good if there is no income. Employment and the level of employment matter in deciding what a person will purchase. During the purchase of the vehicle, I was already in employment. I was earning a significantly good salary during a period when the economy was expanding. During this period, the economy was stable and the prospects of future growth were higher than normal. These prospects never brought the idea of the a possibility of the economy going to a recession thus risking losing a job and being unable to pay the auto-loan acquired for the purchase of the SUV.
In an economic setting that is unstable, it is more likely for persons to take precaution when making the purchase of a vehicle due to auto-loans. The borrowing rates are affected with the economic situation as well as employment. For example, when the economy is suffering from a recession, employment rates will go down. Additionally, there will be an increased job cuts from most companies and organizations as a measure to recover from the recession. During my purchase, the economy was booming and I never considered such a possibility of rendering me jobless (Simon, 2009).
Influence of federal and state level programs in purchase decisions
Federal and state level programs affect the purchase decisions of a person. The programs include financial programs and aid programs to the society to improve their living conditions. For example, a program made to ensure that there is improved employment in the region. The result of such a decision will be an inflated economy. Such an economy creates a possible distortion in the long run. Interest rates and taxes might rise as a result. When interests and taxes are high, it is most likely that the prices of goods will also be high. For the purchase of products such as a motor vehicle is highly prices thus taxes and interest rates are significant to the price of good.
Influence of environmental factors such as emissions and health concerns
In the United States, the purchase of vehicles has been limited to the environmentally friendly vehicles. The Volkswagen group is currently facing a law suit due to emissions cheating. As a result, during my purchase, I had to have the environmental factors at hand as important. Even though buying a vehicle cannot give a person the idea on the amount of emissions that can be released, it is important to have the environmental factors at a priority while making a vehicle purchase. I had to look at the manufacturer to determine whether the levels of emissions that the vehicle was going to produce. Determination of the factor was based on the engine capacity and the modes of transmission (Koenigs & Tranel, 2007).
How the purchase illustrates one piece of the circular flow model of economic activity
The vehicle purchase illustrates firm segment which is the goods and services markets part of a circular flow model. In the circular flow, goods and services markets in the firm segment represent a segment where individuals purchase goods and services in the market. In my case, I purchased goods and services from the market which illustrates the piece. The other piece of the circular flow is the household. Money flows from individuals to businesses easily through the circular flow. In purchases, people take their savings to the business places to offer the firms money for a particular good or service.
The circular flow model is thus highly represented in the purchase of the vehicle. The model is also symbolized through other factors such as taxes and interest rates. The purchase of gasoline is also a factor that influences the flow in the long run. Money circulates from the domestic consumer to the company’s revolving around the automotive service industry to the government in form of taxes as leakages (Lerner, Small & Loewenstein, 2004).
Economy's influence on personal and business decision
The economy of a country is critical to persons making purchase decisions regardless the quantity of goods purchased. Factors such as inflation, interest rates, exchange rates and taxes affect the prices of goods. All the economic factors are dictated by the supply and demand for money in the economy. For example, when there is inflation in the economy, it is more likely that there is an increase in general prices of goods. As a result, the government will impose fiscal or monetary policies to reduce the amount of money in circulation. Monetary and fiscal policies always tend to reduce liquidity that will consequently reduce the purchase power of individuals (Simon, 2009).
Investment decisions are mainly affected by interest rates and savings. When there are high interest rates, individuals save more money in the banks to have huge returns in the future. As individuals save more, they reduce their consumption. As a result, savings lead to investments in the long run. In most cases, when savings are high, people tend to invest in finance securities such as bonds and shares. Therefore, both interest rates and savings affect the rate of investments in any economy. In the purchase of a vehicle, a person is likely to save first then make the purchase later or use a loan to make the purchase and pay for the goods within a specified period (Koenigs & Tranel, 2007).
CONCLUSION
The paper has shown the importance of the economic factors in making purchase and investment decisions. In every society, the consumer behavior is controlled by these factors largely among other factors. In the purchase decisions involving huge sums of money for a consumer, interest rates are seen to be the most important factors of determination as seen (Simon, 2009).
REFERENCES;
Deppe, M., Schwindt, W., Kugel, H., Plassmann, H., & Kenning, P. (2005). Nonlinear responses within the medial prefrontal cortex reveal when specific implicit information influences economic decision making. Journal of Neuroimaging, 15(2), 171-182.
Koenigs, M., & Tranel, D. (2007). Irrational economic decision-making after ventromedial prefrontal damage: evidence from the Ultimatum Game. The Journal of neuroscience, 27(4), 951-956.
Lerner, J. S., Small, D. A., & Loewenstein, G. (2004). Heart strings and purse strings carryover effects of emotions on economic decisions. Psychological Science, 15(5), 337-341.
Simon, H. A. (2009). Theories of decision-making in economics and behavioral science. The American economic review, 49(3), 253-283.
