Gary Dek is a writer for Gajizmo.com who is always looking for ways to make and invest money. Gary has previously worked for an internet company on their M&A team, as well as in investment banking and private equity.
While an old car may seem to save on monthly expenses since there is no car note and often no collision, comprehensive, or gap insurance coverage premiums, the cost of repairing a car with little monetary value may be greater than the cost to replace the vehicle. Plus there are the awesome benefits of buying a new car, like a 2013 Camaro 2SS, though a car that fast would get me into a lot of trouble.
However, the decision to replace a car may not be easy. As a car enthusiast myself, I struggle with the urge to buy a sports car multiple times a year, but instead opt to invest my cash.
If car breakdowns are making it difficult or impossible for you to get to work every day and putting your job in jeopardy, the car is probably costing you more than a replacement would.
Buying A New Car
While in most cases it is best to buy a late model used car, new car dealers often offer extremely low interest on 60 month loans for qualified buyers, sometimes as low as .9% or 1.9% APR. To be a qualified buyer, you must have excellent credit, which is why it is smart to learn what a good credit score is 12 to 24 months before you plan to purchase a vehicle.
Never finance the cost of sales tax and always have a reasonable down payment ($5,000 or more, if you can afford it) when buying a new car to avoid being upside down in your loan. If you have to drive to work every day, it pays to put money aside each month to cover the down payment since you know you will have to buy one eventually.
When picking a car, choose a make and model that fits your budget and is designed to handle the type of driving you will do. If you drive 20+ miles round trip in traffic on a daily basis, work in an office and don’t transport a boat or ATVs on the weekend, buying a V8 truck isn’t a practical or logical decision.
If you just got a promotion and started making $200,000 a year as an executive at a medium-sized business, do you really need to show the community you are successful by buying a luxury $80,000 car? Just because you can afford up to X dollars per month in car payments doesn’t mean you have to spend that amount. For me, real monetary success is measured by how much money I have in the bank and in investable assets, not the amount I’ve spend on consumer products that will likely never appreciate.
For these reasons, my general rule is: if I don’t absolutely need a new car because my current one is unreliable, I will only purchase one if I could afford to pay 100% cash, or pay off the note within 6 months. This doesn’t mean that I will necessarily use cash to buy a car – I will most certainly finance it so that I can continue to invest my cash at a higher rate of return than my car note (the S&P did return approximately 16% last year).
This just means that, unless it’s a dire situation, why purchase a $50,000 unless I have, for example, $500,000 in investments, where 10% of my net worth would not make a big difference to me. However, I understand everyone’s threshold and financial situation is different, so apply a budget given your own personal preferences. Just remember, don’t be one of those people I see in Los Angeles or Orange County who drive a luxury Mercedes or BMW but pull up to a low-rent apartment building.
Keeping An Old Car
Even with regular maintenance and good care, cars parts wear out over time. If a car requires more than one major repair in a six month period, it is probably time to replace the vehicle. The cost of major repairs is likely to exceed the price of multiple car payments. The exception to this rule is if you can perform the car repairs yourself. The biggest cost of car repairs is not usually parts – it is labor. If you are able to do your own car repairs or have a mechanic friend who cuts you a brake on his labor rates, you can probably save enough to keep your old car out of the scrap yard.
If you do have to get rid of your old car, you have some options to consider. If it is running, you could sell it privately or use it as a trade in to cover part of a new car down payment. Here are a few basic tips on how to trade in your car:
- Choose the same maker’s dealership to trade into – the dealer is more likely to purchase your vehicle for their own lot, which means more profit for them, instead of trying to broker and sell it at wholesale.
- Wash the car and clean the interior – presentation is important.
- Timing is essential – buy a new car right before the next model year releases.
- If different counties have different sales tax percentages, travel a bit and buy from lower sales tax areas. Even half a percent can save you several hundred dollars.
If it is not running, you can scrap it at a recycling center which will pay you money based on the weight of the car. Charitable organizations like Good Will and the Red Cross take cars, even ones that don’t start or work anymore, as donations and this option provides an income tax write off as long as the organization qualifies for non-profit status with the IRS. Be extra careful and detailed with documentation of this transaction because donations and charitable giving are a common area of fraudulent deductions and may increase your chances of an audit.
Some people will spend ridiculous amounts of money on repairs because they feel a sentimental attachment to a particular car. If the car is constantly in the shop, it is a drain on your budget and needs to go (or stay parked in your garage). Keep pictures of the car, but trade it in, sell it, or scrap it and buy a car that is dependable.
Finding A Middle Ground
New cars are expensive and if you do not qualify for special interest rates, car payments can be overwhelming. If you cannot afford a brand new car or if you do not qualify for special deals from dealers, a certified pre-owned car often has a lower price tag and a warranty. Some people have mixed feeling about buying a used car, but there are certain steps you can take to ensure you protect yourself.
First, cars that are 3 or 4 years old are generally 25% to 40% cheaper than their brand new counterparts, so paying a few hundred or couple thousand dollars to service a vehicle over the next 5 years is a bargain.
Second, avoid buying the wrong car that turns out to be a lemon. Always purchase a vehicle with low mileage or light use. The average driver puts about 12,000 to 15,000 miles on a vehicle per year. A car that is 3 years old should have no more than 40,000 to 45,000 miles on it; otherwise, you are looking at a vehicle that may have significant wear and tear issues down the line.
Third, inspect the interior and exterior. Minor aesthetic issues are normal and generally mean the previous owner took care of their vehicle. Carpet stains, cigarette burns, a loss of gloss on the paint, and dents or noticeable repair work could indicate that the car was heavily used with minimal attention to its condition.
After you finally decide on a vehicle, but before you automatically finance the car through a dealership, consider asking your own bank for a loan. If you are a good customer, your bank or credit union may offer you a better interest rate than a dealership. If at all possible, avoid “Buy Here, Pay Here” lots. Not only are the cars usually overpriced, the interest rates are at the higher end because these dealers cater to people with bad credit.
Another way to help beat the high cost of auto repairs is to buy a private auto warranty from a company that specializes in this type of coverage. Warranties may not be available for old cars, but if you buy it on a late model vehicle, you can usually renew the warranty yearly. Warranty insurance can be worthwhile if you put a lot of mileage on your car and this car repair insurance pays for most major repairs. Be sure to read the fine print since some warranties only cover drive train repairs, and these are the parts least likely to break down or wear out. I only mention private warranty coverage because it is an option that may be suitable for some, but I wouldn’t recommend it. As always, if the deal is too good to be true, buyer beware.
What about you? Do you have an old car or new car? Why?
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Simple Living says
June 7, 2013 at 3:13 amA very debatable topic which will surely get a ton of comments. I'd look at some possible tax breaks if its a new car and creative ways of purchasing it – general lease, novated lease, purchase with pre-taxed payments through work, etc
I guess it comes down to comparing the two through a good old pros & cons list with side by side costs – i love a good spreadsheet
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@Gajizmo says
June 7, 2013 at 4:45 pmI like the "creative ways of purchasing it" idea. I had a Finance professor a few years back who was able to use tax breaks to make a BMW X5 as affordable as a Toyota SUV. Crazy, though I don't think those tax breaks exist anymore.
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DC@Young Adult Money says
June 7, 2013 at 6:18 amMy car is about to eclipse 210k miles and I will happily continue to drive it until it needs a major repair. There's really no reason for me to upgrade besides for comfort/standard of living increase, so I am holding out. I will probably buy a cheaper car this next time and try to save up for an SUV in the future.
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@Gajizmo says
June 7, 2013 at 4:46 pmAgreed, DC. Since I work at home, I don't have the need to buy a new car any time soon. As much as I would love a sweet new car, financial security is worth a lot more to me.
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Chris Mettler says
June 7, 2013 at 6:38 amThe problem with keeping an old car really is that you are going to overpay on insurance, isn't it? And when the numbers start swinging against your favour, you should perhaps consider getting an upgrade sooner rather than later.
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@Gajizmo says
June 7, 2013 at 4:48 pmWell, actually, old cars have very cheap insurance. First, you don't need full coverage, just liability. Second, the value of the car is minimal, so the premiums are low to begin with. And lastly, you should have a very high deductible (around $1,000).
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Your Daily Finance says
June 7, 2013 at 6:46 amI have a car that I paid about 800 dollars for. Before that I own a honda civic that only cost 30 to fill up the tank. So to answer your question I drive older/cheaper cars. I am trying to get to a point in my life and honestly a car is just another cost that I dont need. I see people with 700-1000 car payments and I am like geez really. Once I hit millionaire status I will consider buying something, maybe. Rather travel and spend time with the family.
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@Gajizmo says
June 7, 2013 at 4:51 pmI'm in the same boat as you. How people who make $60,000 a year decide to buy a $50,000 car is insane? Unless they are eating and sleeping in their car, that's just dumb. And I miss the days $30 could fill up a tank. I live in CA (as if you couldn't tell by the rip on some citizens of LA/OC in the article) and a full tank is at least $60.
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Holly@ClubThrifty says
June 7, 2013 at 7:04 amI like to drive newer cars but we always buy them used. The last car we bought was Greg's 2009 Prius with 20,000 miles.
@Gajizmo says
June 7, 2013 at 4:53 pmHolly – I used to be afraid of used cars, but my parents recently bought a luxury vehicle for 45% of the new sticker price. It was 3 years old and had 30,000 miles. With a deal like that – even if I made a million a year, I'd still buy a used car a couple years old. That's just too much savings to pass up.
@mycrazyrichlife says
June 7, 2013 at 8:24 amI had a terrible experience with my used car. I paid about $3000 for it and I was ecstatic since I paid cash and I did not have to go into debt. Then a month later, the engine was overheating and I took it in to get it looked at and BAM! $2000 later and my car was in driving condition. Then a couple of months later, my AC goes out, not the cheap fix either – another $600. A week after I get my AC fixed, my exhaust system falls apart – literally – another $400. This is all whithin a 6 month period of me purchasing the car. I thought about getting rid of it, but I had just bought it and spent all my savings on it so I really had no choice but to keep it and keep fixing it. Basically my $3000 car ended up costing me $6000 and a whole lot of stress. Kind of wish I would have just sold it when the engine went out and started over with at $3000 loss.
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Ree Klein says
June 7, 2013 at 8:56 amInteresting post. I'm a big believer in never having a car payment even if you can get a better return by investing your money. Why? Because you never know what the future holds. If you're working on wealth building, a bad investment or market crash could land you with no assets except a car with a payment due each month. Anyway, I see a car as a liability unless you're earning money with it somehow.
I vote for the better-be-safe-than-sorry method of car buying…pay cash for the best car you can afford. You can always trade up when you have the cash set aside to make the switch.
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@Gajizmo says
June 7, 2013 at 4:57 pmRee, I can see where you are coming from, but considering the huge gap between investment returns (10%+) and the interest rates charged on car loans for buyers with good credit (3% or less), I'd finance. The caveat is that I am assuming your investments are diversified enough where you can't go from $100,000 to $0. Losing 10% and selling off your stocks is one thing – putting your money into a business venture that could result in you losing all your money is something completely different. Then again, I don't think you or I would put all our money into investments and not leave at least 10% of our net worth in cash in a saving or checking account.
John S @ Frugal Rules says
June 7, 2013 at 9:37 amOur last car was a new one, but we were able to score a really nice deal on it. We plan on driving it into the ground though and hpe to be able to give it to our five year old when she starts driving.
@Gajizmo says
June 7, 2013 at 4:59 pmNow that's good planning. No need to buy a new car, the insurance premiums will be low, and she can bump and scratch it without her parents going crazy. Plus, I think it's important kids build self-confidence and character outside of their material possessions. My little brother drove a van throughout high school and even wrote a great personal statement for college admissions on how it molded him.
Budget & the Beach says
June 7, 2013 at 10:23 amGREAT advice, especially for me right now because I've had significant repairs done in the last year. While I'm going to keep trying to drive the car as long as possible (unless like you said another major repair comes up within the year), I am starting a specific savings bucket for a new car, basically paying myself what I might be paying for a car payment. And I still go back and forth whether I want a new or new (used) vehicle, but I'm leaning towards used but with very light mileage.
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@Gajizmo says
June 7, 2013 at 5:02 pmGood thinking – used but light mileage. If you can score a car that is 2-4 years old with low mileage – it means that the person likely wasn't a heavy commuter to work and likely didn't put too much strain on the car. Additionally, cars with very few scratches and dents, and regular maintenance, mean that the owner actually took care of the car. Those shouldn't give you any problems for at least a few years. Good luck on the search! =)
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alwayshungry4 says
June 7, 2013 at 10:26 amThat's funny you mentioned the SoCal phenomenon of super nice cars but then renting in a less than nice neighborhood because it's all too true. I'll probably need a new car soon, but I'm more for finding something reliable than flashy.
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@Gajizmo says
June 7, 2013 at 5:04 pmHahaha, right??? You know exactly what I'm talking about. It's too common to not notice. I particularly hate the use of EBT and then people put their groceries in their brand new Yukon or G-Class Benz. I have no problem with social welfare, to those WHO NEED IT! There's just too much fraud, but that's another discussion.
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jefferson @SDR says
June 7, 2013 at 10:42 amNow that we have our house situation finally settled, Michelle and I are wondering about whether or not we should replace our primary vehicle. We just recently escaped the car payment rat-race as well, and our growing family of five isn't fitting so well into our smaller SUV.
The money saver in me says that we should just stick it out, and keep driving the ol' tank until she croaks. However, we could get a nice trade-in value for her right now, and that won't always be the case.
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MakingSenseofCents says
June 7, 2013 at 10:49 amIf you need a car, W can get you a great deal 🙂 He works at a Chevy dealership in St. Peters but can source any brand car from any Fusz dealership 🙂 Just thought that I would advertise his services haha
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Jake @ CC Wealth says
June 7, 2013 at 11:56 amThese are great tips. My car is getting pretty old (it's a 2003) so I will have to make this decision in the next two years. I've been thinking that we'll probably buy a car that's like 2 years old so that we can save around 25% of the cost, but still get a nice car.
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krantcents says
June 7, 2013 at 12:28 pmI replaced my 17 year old car last summer with a new car. I still have another 17 year old car, but I will keep it one more year. I believe in buying new and run it into the ground.
E.M. says
June 7, 2013 at 12:42 pmI bought a 2002 Civic four years ago that has been very reliable. It only has about 80k miles on it I believe (I took it on some long trips, when I first got it the mileage was around 55k-60k) so it's still got a long ways to go! I am planning on having to do some major-ish repairs soon with 100k miles coming up, plus I could use new front tires, but buying another car is not in my immediate future unless something happens.
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iheartbudgets says
June 7, 2013 at 12:48 pmMy brain explodes when I see anyone advocate buying a new car. I don't have the time to spill my guts here, but luckily, I've already written about it.
http://www.iheartbudgets.net/2012/06/you-dont-nee…
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Nick @ AYoungPro.com says
June 7, 2013 at 1:51 pmI plan on driving my car until the wheels fall off. That being said, I'm sure I will update my wife's car regularly. I'm not sure which side of the argument that puts me on. 🙂
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rockermocking says
June 7, 2013 at 2:05 pmI am against buying completely new.
You can buy a practically brand new car that is technically used and save over 30% off the cost of an American sedan.
Case in point– I was looking for a car for my mom online and a dealer in Georgia had a used 2013 Chevey Cruze that was fully loaded (leather, sunroof, GPS, etc). The car was technically used even though it only had 1,400 miles on it. More than likely it was from a buyer who returned the vehicle after purchasing it (which is really common).
Instead of the $26,000 for a technically brand new car, the dealer was asking for $18,000. Why would anyone go for a new car when you can get that kind of a deal on a barely used vehicle?
And there are plenty of cars like this out there, especially in suburban cities in the south and west of the Mississippi where more people own cars.
I live in NY but I know I could still save money flying to the Atlanta area where my mom lives to buy my next car if there is another crazy deal like that when the time comes to replace my 2002 Corolla (with 170k miles and counting). Buying brand new is just silly!
also, don't forget that another great place to buy a used car is from car rental companies…
1stmillionhardest says
June 7, 2013 at 4:31 pmI struggle with the temptation to buy new cars all the time. I love cars, its a weakness. I bought my car new in 2007 and paid it off in 2009. While I don't plan to "drive it into the ground" I do plan to drive it for a few more years and then probably trade it in for a used car that is two or three years old.
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Angella says
June 7, 2013 at 5:12 pmI can understand the pros and cons of both sides, but for us, we stick to older and used to avoid having a car payment. Our Hondas each have over 100K miles (2002, 2005 models) and are still going strong. As long as a vehicle can get us from point A to B safely, we're happy!
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Thrifty Dad says
June 10, 2013 at 8:26 amThis is something both my wife and I have been contemplating for a while. Both our cars are over 12 years old and our first cars. I’ve never bought a new car and don’t really plan to, as as soon as you drive it off the lot, it’s already lost a good chunk of it’s value. We’re saving to buy a newer family-sized car and pay in cash, and plan to sell our current ones, but our cars are not too happy about that idea and starting to show signs that they’re quickly nearing their end.
AxeMan says
June 10, 2013 at 10:38 amI drive an 11 year old car because the overall cost of the vehicle is far less than owning a new vehicle. The insurance is cheaper, the registration is less, and it has already taken on the majority of the depreciation before I purchased it.
Jenny @ Frugal Guru Guide says
June 14, 2013 at 1:31 pmI’ve finished my book on frugal car ownership (YAY!–just have to do formatting), and through all my research, I found that KEEPING your car will almost always be the cheapest over the long haul. But that doesn’t mean that no one should buy more than one car–there are plenty of reasons to buy things other than because it will save you money!
Caleb says
October 30, 2013 at 8:54 amThis is a tough decision to make. I think there are many things that you have to take into consideration. Is your old car still running well, do you spend way too much on maintenance or is it that you just want something new? These are good questions to ask. Can you afford a new car and not struggle financially in other areas? Make sure that you understand the effects of buying a new car will have.
Willie Arnold says
January 16, 2015 at 2:46 pmPeople have different choice. Some will choose to buy a new car and others will go for a used one. I am will be going for the new one. I have never had good luck with used things.
Cindy Hoffman says
January 18, 2016 at 4:43 amHi there Michelle, I landed on this post by clicking on a link form another blog post and I am glad that I came across it. It seems kinda old post, but nothing changes when it comes to deciding between using an old car or buying another one. It is a touch decision to make but there are some factors like cost, frequency of breakdown and such. I have an old classic 1969 Ford Cortina which I love so much. It’s economical and at the same times gives me a unique ride 🙂 Thanks a lot for the great post, I enjoyed reading it.
Cindy
Tim Yaotome says
January 2, 2019 at 8:59 pmThanks for the tip to bring a car down to a recycling center if it does not run anymore. In my opinion, that is another place where other car owners can use them to get them back into shape through restoration. To do so, one must first find a junk car for sale listing online. That way, a car enthusiast can hunt down their favorite car and make an informed decision to get it.