When should you replace your old car?

All good things must come to an end. What is true in relationships also applies to cars. Even the most reliable vehicle breaks down eventually. And when that moment arrives, you will need to start looking for a replacement.

This process of separation can be painful. Cars can be like friends, after all. We share many wonderful memories with them. Sometimes, they can almost feel like a family member. (See the classic How I Met Your Mother episode “Arrivederci, Fiero” for an example)

At some point, however, you will need to admit to yourself that you need to bury those memories.

But when, exactly, is it time to replace your old car?

It sounds like a straightforward question. In reality, it is anything but. This is because the motivations for holding on to a vehicle are as diverse as the personalities of the people driving them. Not even a financial perspective will yield definite answers.

Which is why we have put together this overview of the topic as a primer to the debate. In it, we’ll point to some possible exit points, explain the pros and cons of trading in an old for a new car and show you how to make vital calculations.

First, however, let’s take a look at when you should start thinking about the topic.

You can’s get started early enough

It may seem a little exaggerated to start thinking about your exit strategy the moment you buy a car. But, according to an insightful article on the today forward blog, that’s pretty much exactly what you should do. At least make sure to set up a plan before major repair bills start piling up. As the author stresses:

“By doing the cost-benefit analysis ahead of time, you’ll be less frustrated and in a better frame of mind to make a well-informed decision.”

So, what are some of the things you should be thinking about? The questions boil down to a few practical issues:

• What kind of car would you replace your current one with? And: What car body style are you looking for? This involves deciding what you really need and where to draw the line between a luxury car and one that simply meets your requirements.
• Do you have a personal limit as to how much you’re willing to spend on repairs? Write down the amount and stick to it once your cars start experiencing problems.

Using the answers to these questions will help you formulate your personal transportation policy. We’ll get to that in more detail towards the end of the article.

The psychology of keeping your car a little longer.

Most of the arguments we’ll discuss in this article are of a financial nature. This makes sense, since cars are expensive and, Ferrari-driving millionaires aside, you’ll have to base your decisions on a budget.

Still, there can be strong psychological reasons for wanting to stick to the car you’re driving until breaks down over replacing it with a different one the very minute the opportunity presents itself. Both mindsets are equally valid in principle. But they can yield very different strategies. So you should at least be aware of your innate biases.

People who want to keep their car for as long as possible usually feel strongly attached to it.

As edmunds.com puts it:

“Maybe it was your first car, a gift from a loved one or a dream car you finally were able to purchase. For you, buying a new car would mean giving up an old friend. This is not the strongest argument for fixing up, but it’s a real one.”

Risk aversion plays a role, too. If you decide to buy a car instead of having your current one repaired, this usually means you’ll have to take important decisions fast. This can result in bad judgement or even in making the wrong choice. By driving your old model a little longer, you can postpone the problem and arrive at a more sound decision.

Then again, buying can also be a sensible choice.

A new car doesn’t just feel better. It also offers peace of mind for those who want to have access to the latest safety technology. Progress is moving fast in this regard. Within the last two years, some major breakthroughs have gone mainstream. If you want to be able to use electronic stability control, back-up cameras or blind-spot monitoring, you will most likely have to get a brand new car.

Psychologically, too, some people just need more change in their life. What feels familiar and comforting to some – knowing that the same car is waiting for you every morning when you leave for work – can feel restricting to others. The popularity of leasing can mainly be attributed to this desire for variety.

Or maybe you no longer want the hassle of taking the car in for repair. Each visit at the mechanic costs you money and time, after all. It also forces you to look for a temporary replacement. In comparison, buying a new car allows you to focus on the actual driving rather than getting your car fixed.

Finance Part I: Investments calculations

There are many different strategies when it comes to replacing an old car with a new one. The most widely used ones pit the costs of repair against the costs of buying.

• According to Living Rich Cheaply, a sensible approach consists in comparing the repair costs to the resale value of the car. If the repair costs almost as much as the current value of the vehicle, you should probably let it go.
• Dave Ramsey, who will meet again at a later stage of this article, has a more concrete example. Say your current model is worth 2,000 and you need a repair that will set you back 1,000. If you can re-sell the car for 3,000, this is a no brainer. If, however, the repair adds nothing to the resale price and literally just costs you, you will probably reconsider.
• Wikihow has an even more advanced strategy on offer: “If the repair costs less than a single month payment for a new car and your car is paid off, it might make more financial sense to do the repairs. If the repairs are less than a few months of payments on a new vehicle and you don’t think you will need more repairs soon, go ahead and get them done. You should consider upgrading to a new car if you start having expensive repairs on your old car every few months.”

The last approach is a sensible strategy, because it takes into consideration, how much time a repair will buy you. Of course, you can never be entirely sure if your judgement is correct. Even an experienced mechanic can arrive at the wrong conclusions. On the other hand, replacing your old car with a used one carries the exact same risk.

Finance Part II: Why past costs don’t matter

Something to consider when thinking about replacing your old car is the question of sunk costs.

Say that again?

Sunk costs are the economic term for money you’ve invested into your car which you’ll never get back. Say you’ve had your timing belt repaired last week. Now, you pick up your car from the mechanic, only to find that suddenly the brakes are acting up. Your first impulse to replace the car. After all: Doesn’t is seem as though the total costs of repair are piling up?

On the other hand, the timing belt replacement has already been performed. You will never get that money back. So the question isn’t how much money you’ve already sunk. The question is how the costs of continuing to drive your current car compare to the costs of getting a new one.

Finance Part III: The costs of buying new

The conclusions from this are clear: You will first need to establish how much your car is costing you. Then, you compare this amount to what a new car would cost you.

You can do this by first talking to a mechanic. Ask her for her opinion what kinds of repair she believes will have to be done over the next two years. Online websites and forums can complement this information. You should be able to find very specific experience reports from other drivers about the model you own. This should give you a reasonably precise picture of how much you will need to spend on repairs and maintenance in general.

Although new cars may seem to be flawless, they rarely are. Each vehicle will incur maintenance and repair costs. They just tend to be a lot lower with a new car. Add to this the higher insurance costs of a new car and the difference in costs quickly melts away. And then, of course, there are the loan payments.

Once you do the maths, a new car is almost always more expensive than a used one. This does not mean you should not get one under any circumstances. But it is a pretty strong case in favour of doing everything in your power to hold on to your current one.

Dave Ramsey’s Financing Idea

Once you’ve done some thinking on the subject, it’s time to set up a strategy. American car expert Dave Ramsey has developed a really interesting approach in this regard.

As you will see, it is clearly biased towards buying. But he adds an intriguing twist to the equation, which turns this into a viable option even if you should have a tight budget:

• Sell your car and buy a new one, using some of your savings and the money you’ve made from the sale. Let’s say this allows you to buy a decent used car for 5,000.
• Drive this car for around ten months, then sell it. While using it, save about 500 each month. This is the average amount you would have spent if you had bought an entirely new car.
• If you can sell the used car for 4,000, you now have a budget to buy a car for 9,000.
• Buy a car for 9,000. This will most likely be a pretty great car. In fact, it may be even better than your first one. You’ve clearly traded up. And the best thing about it is that you did not have to borrow a single penny from the bank.

You can continue to sell and upgrade this way. Or you can be satisfied with what you have and start saving for something else. Either way, Ramsey’s strategy is a concept that warrants further investigation.

Personal Transportation Policy

Now, let’s return to that useful article from Today Forward about coming up with a personal transportation strategy. The author essentially contrasts two different approaches:

“Buy only used cars that are three to four years old, drive the car for at least five years or until annual repairs exceed $2,500, when it’s time for a new car, donate the old one to charity.” Or „buy only new cars because they are more reliable, drive the car for three years or until a more desirable new car is available, trade-in the old car for a new one.”

The difference in costs can be considerable, so chose your strategy wisely. While the second approach can seem perfectly reasonable, the difference over a lifetime of owning various cars can amount to several hundred thousands of Pounds.

This does not make the second strategy worthless. But you should definitely consider whether you really need to buy a new car every three years. Maybe it’s wiser to opt for a cheaper option instead.

Leasing / Repairing things yourself

With this in mind, it makes sense to hold off buying a new car for as long you can. Leasing has often been touted as an interesting alternative in this regard. Proponents have argued that it offers the best of both worlds: The thrill of a new car every three years without having to pay the full costs of a car. There will often also be additional perks. One example is a free replacement vehicle in case of a repair.

However, on a long enough time line, leasing is always more expensive than buying a car, used or new. In fact, of all financing options available to you, leasing is the most expensive by far.

A far better possibility to reduce ownership costs is to take care of some of the repairs yourself. Of course, you need to be realistic about what you can and can not do. But there are decidedly plenty of jobs that you can take into your own hands. Moneycrashers cite car enthusiast Mike Arman, who recommends avoiding professional mechanics:

“Arman explains that while chain car maintenance outlets charge approximately $150 to replace front brake pads, the job can be done for much cheaper. The needed parts are only $20, and often come with a lifetime warranty, which means you receive free pads each time you need a new set.”

We couldn’t agree more. At Concept Car Credit, we have plenty of used vehicles that are in a fantastic condition and will give you many years of driving pleasure. Just drop by our Manchester showroom to take a look at our selection.