I get this question all the time, especially in Atlanta where people are car conscious. The debate around how long to keep the old car you have been nursing the scratches and bruises versus getting the latest and greatest new ride to put on the highway. Take the emotions out of it, and I can give you some sound advice around how long to hold on to the clunker. Remember, the car you buy (unless it is a collector’s item) is one of the sure fire assets to constantly depreciate on an annual basis the moment you take it off the lot. However, here are some thoughts you should consider before you make the plunge.
- Compare your current overall repair and maintenance bills versus the cost of the new car payment. While a new car will have some maintenance on a yearly basis, you really need to compare the total annual cost of all of your repair bills versus the cost of a new car payment. On a $25,000 car that you put down $2,500 and finance the rest over 4 years, your monthly payment would be $525 per month at a 6% loan interest rate. This means that your annual repairs and maintenance would need to exceed over $6,300 per year to make an equal comparison. Odds are if your annual repairs on your current automobile are costing you more than you can afford right now, you won’t be likely to afford a car payment that is more than the annual outlay of your current repair expenses.
- It may be that your current automobile may not have some of the up to date safety features such as driver, passenger, and side air bags. Or, perhaps there are gadgets in the newer automobiles that may help you save time over what it takes you today such as a built in GPS system. Remember, that there are new mobile technology such as Garmin’s and TomTom’s, and the dealer or a local mechanic may be able to install some of those new safety features. Your old car may not look as cool as the new one, but you would still be able to have some of those great features.
- Your lifestyle has changed. The easiest example may be around a family change. Perhaps you had a new addition to the family (or two!). You moved from a warmer climate area to a colder climate area or vice versa. These types of changes could be a real reason to trade your old vehicle and make a purchase of a new one. I won’t even discuss the I want to look cool factor as no person can measure how much this means to you.
- Interest rates. This is an important factor when looking at this decision as sometimes you can find a deal with low or no interest on the new automobile purchase. With the borrowing problems we saw over the past couple of years, I suspect you will see fewer of these as finance companies simply cannot take on the risks of someone who has a lot of debt, or does not have the income to support the purchase over a four or five year time frame. However, if you believe interest rates are going to go up over the next few years you may be able lock into a fixed rate now to borrow for that new car.
- Look at your warranty. The last point I would make is to review your warranty. Each warranty has a different set of fine print, but if your warranty on major repair items runs out at 100,000, then this may be a consideration on when you trade in for a new car. Certainly mileage is one of the key factors for trade in value, but the lapse of a warranty could prove to be a big blow to your budget if a major part in your car needs repair.
I have never been a big fan of buying new cars as I see them as a serious drain on cash flow. The asset never increases over time with the exception of a few collectibles, and most of the cars end up back up at the dealership where you are looking at $100 per hour for labor when you take it in for service. If your ego can stomach it, keep that old car for eight to ten year rather than three to five years. You just might find out you can put a few more dollars away to the financial goals that you have.
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