If you drive a car you have to deal with repair bills. It’s a fact of life. At what point do you throw in the towel and stop fixing your old clunker? How do you know if you should fix or replace your car? (You might find it interesting to read this post on when it makes sense to buy a brand new car from the dealer.)
A friend of mine faced that exact situation. She has an 11 year old van that she loves – but rather than her driving it, it is driving her to the poor house. If her jalopy was in top shape it would be worth about $11,000. But her mechanic told her she needs to sink $5500 into the car to make it right. In its current shape; she’d get about $4,000 if she sold her used car. Rachel could either spend that $5500 or buy a “new” 2 year old van for $35,000. Which road should she take?
Before we get there, it’s important to keep in mind that the longer you hold on to a car, the better. (assuming the car is safe of course). That’s because older cars generally cost you less per mile to drive than new cars. Newer cars cost more to insure and register and depreciation is front loaded. That means there is more depreciation during the first few years than during the last years of its useful life.
Having said that, there comes a time when the cost of keeping your car on the road exceeds the cost of replacing it. Sometimes we keep cars longer than we should because we have problems financing the purchase. I get it. But there are so many auto financing options these days, it doesn’t make sense to bury your head in the sand. When your car is used up, you know it.
After further discussion, Rachael told me that if she does the repair, she’ll sell the car in a couple of years and she expects to get about $10,000 for it that time. Of course there is no guarantee that she’ll be able to do that. And she might incur other expensive repairs during that time as well. But let’s assume she can sell the car for $10,000 in 2 years without incurring costly repairs and compare this to buying the used van for $35,000. Further assume she’ll drive the replacement van for 10 years and then sell it for $10,000 as well.
When you have all this information, you can see that the question isn’t all that complicated. Since the new car costs $35,000 and will be worth $10,000 in ten years, it costs her $2500 per year to drive excluding maintenance. The old car is worth $4,000 now so if she sinks another $5500 into it and sells it for $10,000 in 2 years, it will cost her nothing to drive that car for the next two years. It doesn’t matter what she paid for the car originally.
Does that mean Rachael should fix her old junker? Not in my opinion. Here’s why:
New cars are safer than older cars. If Rachael upgrades to the new wheels, she’ll be more secure. You can’t put a price tag on that.
New cars have more creature comforts than older cars. Rachael is still young – but she’s 10 years older than she was when she first bought the car she’s driving now. Newer cars are easier to use, safer to drive and have innovations nobody even dreamed possible a decade ago. Why not enjoy those advances now?
Even though Rachael’s mechanic convinced her that her old car won’t need any repairs once she forks over the $5 grand – I’m not sold. Nobody can predict the future – not even a car mechanic. Rachael runs the risk of spending that money now and then having to pour money into the car down the road. I don’t like it.
At the end of the day, Rachael fixed up her old car and is driving it today. She took that road because she just loves driving the old clunker. She made an emotional but understandable decision.
This isn’t an easy decision. Which way would you go? Why?