Fix the Car or Buy a New One?
Your car is starting to get on a bit and you had a couple of things that have been repaired. It’s time to sell it and get another one. It will be cheaper to buy a new one rather than fix any expensive repairs. Right? While this is generally the rational for replacing a car, it doesn’t generally hold true. In fact, the best way to keep your money where it belongs, in your wallet, is to keep your car as long as possible.
A well-serviced petrol engine will go 300,000 km or more, and a diesel engine can go 500,000 km, without major repairs. The longer you drive it, the more you save. You’ll save in depreciation, interest and insurance.
Let’s say we’re going to sell our ten-year-old Toyota Camry and buy a new 2014 Toyota Camry. We sold the 10-year-old Camry privately for $6,000 (Red Book Value).
Depreciation is the decline of your car’s value. Cars, on average, depreciate about 14% per year in the first 3 years and then 6% per year after that. A brand new Toyota Camry costs $27,000. Depreciation for the first 3 years will cost $9826.80 vs $1016.50 for your existing car.
Total depreciation savings by keeping the existing car is $8,810.30.
If you borrowed $21,000 to buy the Camry, then the interest in the first 12 months, at 10%, will be $5,296.13 for 3 years.
Total interest savings by keeping the existing car is $5,296.13.
The insurance premium will go from $442 to $536 for the new car, reflecting a higher replacement cost for the new vehicle.
Total insurance savings by keeping the existing car is $282.
Total savings by keeping your existing car = $14,388.43
So when do you buy a new car?
If you need to get a loan to buy the new car, then your repair costs on your current car need to be more than $14,388 over 3 years before it’s cheaper to buy that new car. This doesn’t include regular service costs. If you are going to use cash to buy the new car, then your repairs need to be more than $9,092 over 3 years before it’s cheaper to buy that new car.
A lot needs to go wrong with your car before you’ll spend that kind of money. If you’re worried about it, discuss with your mechanic what is likely to go wrong and how much it will cost.
The longer you can drag out the use of your car, the better. Depreciation and interest are financial killers. They’re silent killers too. If you had to pay your depreciation bill every quarter like your electricity bill, I’m certain that less people would buy new cars.