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?)
Hi Michael,
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?
Many thanks!
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?
Tags: Car, car financing, financing, lease, leased car, new car, trade-in, used car, when to repair a car
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I don’t know why people always mix repair expense with the value of the car. What is wrong with paying $5,000 to repair a car that is worth $3,000 after the repair? What is this “negative value” nonsense?
The math actually works the other way: if you do not fix the car, the resale value is 0, and you have to pay somebody to take it off your hands; if you fix the car, the actual cost is only $2,000, because now you have $3,000 in equity (resale value).
Of course you fix the car to keep it, so the question should be whether it is cheaper to run the old car – taking into consideration of the $5,000 for repairs – vs. the alternative, that is, to buy a new or slightly used car. Unfortunately this article made no mention of this key point, therefore this article is completely irrelevant.
So again it all comes down to the infamous repair vs. depreciation argument. If your annual repair bill is less than the depreciation on the replacement, you should repair, otherwise replace. Assuming the replacement depreciates $2,000 a year – a Honda Civic, for example, it might be more advantageous to replace the Volvo. It is not because of the $5,000 repairs, which can be recovered in three years, but it is because the subsequent repairs that should be anticipated. In other words, it is because Volvo is crap.
5 years ago I personally spent $8,000 to repair a $2,000 car. Would I have done it if I had known before hand that the repairs would cost $8,000? No. Am I glad that I did it? Absolutely. In these 5 years I spent a total of $10,000 on car repairs and maintenance, sure, with $2,000 a year it is almost as much as the depreciation of a new car, still I save on car insurance and car loan interest. Besides, my car is now in excellent mechanical condition and will not need big repairs in the foreseeable future. Remember, depreciation stops only when the car is worth $2,000, your replacement will keep depreciating until it becomes the car that it replaces.
@Jun: Perhaps we’ll have to agree to disagree. My main issues with your comments:
First, anytime you spend $5,000 to buy something (car or otherwise) worth only $3,000 – your net worth immediately goes down by $2,000. Do this often enough and you’ll eventually go broke. (Remember, you can always but a car worth $3,000 for $3,000, not the $5,000 you imply the original questioner ought to pay).
Second, if you decide to trade-in your car in the process of getting one, its resale value (even if not repaired) is far greater than $0 – the dealership will be able to do the repairs for far less than you can (at its cost), and has an incentive to overpay so it can sell the other car to you. Been there and done that – but only once. My car is more than ten years old – but when the repairs will cost more than it’s worth repaired – it’s time to move on.
I know this is an old post, but I will reply in case someone else reads this so they have another point of view to consider.
The argument that you are immediately minus $2K only applies if you are selling the car NOW. Of course, paying 5k and selling for 3k will bring you to a net loss of 2k. However, most people that own a car own it because it is convenient or a necessity and part of car ownership is that the car always has a cost per mile or cost per 1k miles. If the car is decent (good reputation and reliability) and the problem was it got too old or owner neglect, then repairing it and keeping it might be better than replacing it with a slightly used car.
All things equal (mpg, avg maintenance, etc) except price to get newer car or repair older car:
Car A (older car) has 5k + 2k (assumed cost needed to repair other known issues) = 7k total cost. If keeping for 5 years = 7000/5 = 1400 per year if you don’t sell the car. If the car still has value(most likely will have since repairs should have brought it to excellent mechanical condition) after the 5 year period the cost will be even lower.
Car B (newer car) cost 7k to acquire = 7000/5 – 1400. We have the same cost per year, however, this car will most likely depreciate, and by this time the car will most likely need small repairs which may bring the overall cost up enough to make it not worth it compared to the older car.
The above doesn’t mean that keeping the car is the right choice, it means that the person should analyze their position from a financial point of view with a long-term plan so they can see their actual costs. It makes no sense to replace with a newer car if the current car will essentially be like a new car (repaired mechanicals), is safe, has low insurance costs, gets decent mpg, etc. On the other hand if the car is unreliable (bad make), gets considerably lower mpg, cost more to maintain an insure, it may be a wiser choice to go with a newer car.
Short answer: We need more information of the current car’s status, mpg, insurance cost, maintenance costs, expected cost after 5 years, time you will keep the car, reliability of the make and information of the car that the person in question is considering (or price point to select a few cars in their place).
Ok, so I am doing my research and I am a bit more decided on what I want to do for my situation…mine is…I own a 1996 Toyota Camry that has over 3G’s-4500g’s of repairs plus a just replaced tranny that’s not even a year from the last original was taken out and replaced with a used one, this second one is also becoming on the fritz-my stepdad bought over 1000 dollars of parts to have a man that was supposed to fix it, fix it-he didnt. Ive never had a car payment as my mom bought this as a grad present(show my age yet?) so I am quite spoiled and have been going back and forth between buying a used car like 09-11, maybe pre-owned certified, or just buy a brand new car and finance it(yaris, kia forte, something around 10-13k). The only thing that has me in a quandary is what I saw on another board-the fact that buying a used car won’t guarantee that you wont be making repairs on it to keep it up as well which I don’t wanna do at all, but not sure I wanna fork out 250-299 a month either but my car is no longer safe with all the minor and major fixes, including that dang tranny, if i choose to keep the car. Thank you for your article. It might pain me but new might be the way to go for piece of mind and I don’t mind driving a yaris, smartcar, forte or whatever for another 10 years of my life…
All the comments made sense and put up one heck of an argument either way. I would just say this: Cars break down; we all get that, but if your old, used car with no warranty and very little monetary value, has proven time and time again that it will break down and cost you lots of money, get rid of it. It will ease your pocket and your stress level…trust me! You will lose your beloved car, but you will also lose the anxiety attacks when you see the panel light up with icons that you know will cost you convenience, time and money. Keep in mind that your car, unless it is some kind of mint condition collectible, will always be a depreciative item. Auto dealers and repair shops, thank God many of us refuse to grasp that concept. Good luck!!
Hi everyone. I too have mulled over purchasing a certified used Toyota or keeping my current vehicle. But the numbers speak for themselves. There is no way I will give up this vehicle, which runs like a charm to go into debt.
Here is my ‘Yota’s story.
1999 Camry CE (v4) automatic
Current Mileage: 224,804 (as of 2.15.2013)
AVG Mpg: 30.9
$4,000.00 Purchase price, cash (2008 – single owner)
$3,135.71 Total repairs/maintenance (as of 2.15.2013)
———
$7,135.71 Total cost (or $118.93/month since 1.1.2008)
$1,555.00 KBB Trade-in Value (Very Good)
$2,345.00 KBB Private Party Value (Very Good)
Had I financed a vehicle with $2,000.000 down at $235/month for 3 years, I would have spent $10,225.00 before taxes.
2011 model year and later Camrys are selling on KBB for $17,000.00 in KBB. I think I made out OK.