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Sell or Maintain the Old Car

By Debi McConnell, Owner of Medi-CAR Auto Repair, Rosemount MN

 

You’ve just been told by your auto repair shop that you will need to spend $1,800 on repairs for your car to get it back on the road.  Ouch!  You argue that the car is 10 years old and has 144,000 miles on it.  You are thinking you are just going to sell it and buy a different car….So, is that a wise decision?

 

You need to ask yourself a few questions:

  1. Did you like the car when it was running well?  Did it suit your life and driving style?
  2. How much have you been spending on repairs and maintenance over the life of your car?
  3. Would you replace it with a new or a used car?

 

Many people complain when their car is in the shop—especially when the necessary repairs were unexpected and costly. Many of us take our cars for granted, as long as they are still driving, we don’t think about proactively looking for car problems.  How many times do you crawl under your car and look for leaks, wearing belts and hoses?

Cars are expensive to purchase and maintain. The modern vehicle is extremely sophisticated—with high tech computers, including 30-50 computer sensors, and vast electrical wiring.  Cars are significantly more expensive to buy then 20 years ago, not only because of inflation, but because they are manufactured with many more amenities, safety features, and computer sophistication.The purchase price of a vehicle is not the only cost to consider. Your vehicle is a machine.  Machines wear out if they are not maintained, especially when you live in MN where are climate is extreme (our hot summers and cold winters are very hard on machines).

Typically, your vehicle will be your second largest expense after your home.  Many financial planners would argue that your car is not really an asset, but rather an expense that should be managed.  So, using that concept, when should you sell the older car and buy new?

Maybe never.

Many financial planners would advise against ever buying a new vehicle from the dealer.  The depreciation in the first year is significant, typically 25-30%.  On the other side, if you are in the market to purchase a used vehicle, BUYER BEWARE!  Very few people will wake up in the morning and decide to sell their perfectly driving vehicle.  Often, people will sell if they are concerned about a looming problem, or upcoming expense.  Make sure you have a trusted auto technician thoroughly inspect the vehicle PRIOR to your purchase.

So, when is it time to give up Ole Betsy?  Many of us cringe when we have to pay a $500 auto repair bill.  That is a large check (or credit card charge) to write.  But we must put that expense in perspective.  Are you spending $500 every month with no end in sight or is a rare occurrence? The key to making the sell versus maintain decision is by crunching a few numbers. Add up all your auto repair expenditures since you owned the vehicle.  Divide your total repair and maintenance expenses by the number of miles you have put on your car (current mileage on the odometer minus the mileage when you purchased the car).

An important part of this process, is projecting future expenses on your car. Your auto repair shop should be doing a complete inspection at least once a year and monitoring your car at each oil change, advising you of potential issues or factory recommended maintenance.  Use that information to project future costs—(and don’t forget to budget accordingly!)

You may think you are spending a lot in maintenance and repair, but when you relate that cost to the number of miles driven, that cost could look minimal (a dime per mile versus $500).  To get a true financial picture, you need to factor in all your costs of ownership, such as depreciation per year, insurance, taxes/fees and any financing costs.

Now you need to analyze the costs associated with a new(er) car.  Depreciation and financing expenses will be significantly higher with a newer car.  A new car typically loses 25-30% of its value after it’s driven off the lot. Financing costs (interest, fees) or opportunity cost (if you liquidated investments), must also be factored in.  In addition, insurance and taxes are more expensive in the car’s younger years.

If you compare the total costs of car ownership in the in the first five years to the next five years (after the car loan is paid off), total cost per mile driven typically is one-half the expense (declining over 50%).  While repair and maintenance costs will double in the second five years, this cost is more than offset by eliminating or reducing financing, depreciation, and lower insurance/tax costs.