It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question. Recently, the questions have been arriving in droves, so get yours in today! As you’ll see from the signature below, they’re also coming in from all over. (Although nothing from Turkey yet. Istanbul, are you out there?)
I own my 2000 Volvo V70 wagon with 140,000 miles outright, but it needs major work to stay on the road – to the tune of $5,000. I am wondering if I should pay for the repairs or replace the car? The private party sale of the car, once repairs are made, would be $3,000 to $4,000 — less than the cost of the repairs.
Here are a few more details about my situation:
- My general MO with cars is to buy a newer used car in good condition and drive it into the ground. I don’t like to spend money on cars, but I do like reliable and comfortable transportation for my family.
- The mechanic who quoted me the repair estimate is fair and has been working on the car since the beginning. We trust him, as much as you can ever trust a mechanic.
- Also, the 5K estimated for repairs are just the critical repairs. There are other repairs that aren’t critical so we’re ignoring those.
- My husband and I plan to buy our first house later this year and don’t want to spend all of our cash. Even though I would normally tap my savings to buy a good used car outright, this year I am hesitant to do it because we will need the money for our down payment.
- I’m considering financing a car, and I’m wondering if I should consider other options, like a new car where there might be some bargains or great incentives.
What do you suggest?
Genevive, Maui, Hawaii
Straightforward Answer: Replace your car with a slightly used car and finance it.
More Detailed Explanation:
I fully realize that my short answer above may draw the ire of some. Although not for that reason, my response is for Genevive’s facts and others in very similar circumstances. Let’s address each of your issues in turn. I believe you really have three considerations:
Consideration # 1: Replace the car or fix the car?
It will cost you more to fix the car than it will be worth after completing the repair. By definition, this means that your car currently, sans repairs, has a negative value. (This happened to my first car after only seven years and 90K miles. You’ve benefited from 9 years and 140K since manufacture so you’ve done okay.)
It’s not a good idea to put money into an asset that is worthless. As you describe your car, your repair needs go well beyond routine and expected maintenance expenses. Furthermore, there are additional expenses, already known, that are needed in the short-term that go above and beyond the $5K amount.
Still, while your car has a negative value to you, it will have some sort of positive value to someone else. If you go to trade-in the car, it will have value as a trade, since a reasonable dealer will do what he can to move a car off his lot. (In this case, the economy will both help and hurt you. The dealer will be excited at the prospect of moving a car, but he’ll be less excited about the idea of taking your clunker. (Yet another reason to keep these two negotiations separate.)
Net: replace the car and get what you can for it. It’s about to become a money-pit.
Consideration # 2: Replace your car with a new or slightly used car?
This used to be a no-brainer: choose a slightly used car. Doing so enables you to avoid the painful, instant, and dramatic depreciation suffered by any new car buyer. It is likely still going to be your best strategy. But it is no longer a no-brainer. Due to the crazy economy we are now in, new car prices have been punished and, in many cases, severely so.
A brief illustration:
My wife and I finally purchased a second car (Until late April, we’d had just one sedan. However, with two growing kids and my new out-of-the home office, we eventually had to concede to running out of room and flexibility). We fully intended on purchasing a used mini-van (insert Dad joke here). But after several weeks of looking for used mini-vans, pricing them and doing just a little bit of negotiating with a new car dealer, the value proposition was notably stronger for the new mini-van.
Because of the economy, certain manufacturers are selling certain model cars at far lower prices than just a few months ago. Also because of the economy, many people are keeping their cars far longer than they would typically (I’m not talking about financially shrewd people who historically have always kept their cars until they couldn’t run anymore; I’m speaking of the masses who replace their cars every three years or so.) As a result, it’s possible that, for the make and model of the car you’re looking for, used cars might not be as readily available as during normal times. Supply and demand doing what they do, used car prices for certain models are strong.
Net: do your research. Depending on your local market conditions, the car model you desire, and your flexibility to consider other car types, you may very well be better off with a new car. Run the numbers, keeping in mind that you should expect and plan to keep a new car two years longer than a used 2007 model.
Consideration # 3: Lease, Finance, or Purchase for Cash?
I’m hugely against car leasing except in very specific circumstances. You’re not an ideal candidate for leasing anyway, given your intention to drive your vehicle for a long time and your history of actually doing so. So the real choice for you is to finance or purchase for cash. That you are even considering purchasing a car for cash puts you in the great minority. You are only able to do so because you either have ample savings, a low car budget, or both.
There are huge upsides in paying cash for a car, most notably avoiding interest charges on your car purchase. Furthermore, you won’t be in the monthly payment trap. Good outcomes to be sure.
But, again, there are other factors at work. You have two primary issues that influence my suggestion to you:
First, there’s the economy again. If you have the financial strength to be an attractive car buyer (good credit and a job), you will be eligible for significant financing opportunities not available to less credentialed buyers (or even to you, during normal economic times.) It is financially responsible to consider such low cost financing options. Currently, several new cars are available at low rate or no-interest financing. While I’m not advocating you sign up for an 8% car loan interest rate, if you can score a 1.9% or 2.9% rate, I’d rather see you with the additional cash in your savings account for emergencies or with the ability to increase your retirement savings.
Your second consideration with regard to financing the automobile is your intended upcoming purchase of your home. If purchasing the car for cash would push you below the 20% down-payment required to avoid PMI, the car for cash purchase option should be eliminated (or you’ll just need to shop for a less expensive home). Since you don’t seem like a “car person,” you’re better off making sure you are the most attractive home buyer you can be. This will mean bringing a sizable down payment to the table.
Genevive: Good luck with your decisions. Let us know how it all works out or if you have any other questions.
Everyone else: okay, where, and how passionately, do you disagree? Or do you see it the same way?