It’s a view you hear all the time. Drivers compare the cost of a big repair—say, a $2,000 transmission replacement—with the resale value of their car, saying, “I’m not going to put $2,000 into a car that’s only worth $2,500.”
But this rationale for buying a new car isn’t always sound. With money tight, keeping the old one going might be a better option. The real issue is the cost of driving, not the value of the vehicle.
In many parts of the world, people keep their cars going until they disintegrate. But in the U.S., late model vehicles are a status symbol, and many people refuse to tolerate any failure. This attitude can cost a fortune.
After a vehicle passes 100,000 miles or so, the repair bills generally start to come more often. While they are a headache, failing mufflers, alternators, belts and hoses should be chalked up to routine maintenance.
Bigger problems, like transmission failures that can cost $2,000 or more, often prompt the owner to buy a new vehicle. But repairs generally make more financial sense if you look at the cost of driving on a per-mile basis.
Assume your current vehicle is paid for, and that it and its potential replacement, a new car, have the same gas mileage and insurance cost.
If rebuilding the transmission for $2,000 gets you another 40,000 miles before other failures overwhelm you, the job will cost five cents per mile. Assume 40,000 miles is four years of driving.
Over four years, a new car will lose a third to half of its value. So a new, $24,000 car will lose at least $8,000 in value over that period, or 20 cents a mile. That’s four times the cost of the transmission repair.
Of course, your old car continues losing value as well. But the steepest losses come early in a car’s life. The annual losses get much smaller as the car ages.
And in reality, the new car probably will cost more to insure, and if you take out a loan to buy it, there will be interest charges as well.
The average five-year new-car loan charges about 6.6%, according to the BankingMyWay.com survey. The Auto Loan Calculator shows this loan would charge just more than $4,000 in interest during the first four years you owned the car. You’d probably have no interest costs on the older car.
Obviously, different assumptions would produce different results, but it’s pretty hard to make the numbers justify a new-car purchase on a purely financial basis.
Use the auto loan search tool to find the lowest auto loan rates available when you weigh the options, as many lenders beat the national averages. Bank of America (Stock Quote: BAC), for example offers five-year loans at 4.6 percent, and National City Bank (Stock Quote: PNC) has one at about 5.3 percent.
Credit unions have some of the best deals.
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