When to Replace an Aging Car
Most insurance companies consider a vehicle is not worth fixing if repairs exceed roughly 80% of the value of the vehicle. This rule of thumb is fine if the vehicle got into a major accident and needs significant repairs to become operational again. The problem is that most cars are not totaled in accidents. Instead, most cars typically have minor repairs and maintenance that increase in frequency and in cost as the vehicle ages. The problem is that there is no easy guidance to determine when repairing an old car is worth it. Here are a few suggestions.
First, determine the value of your aging car. You can do this by using the free Kelly Blue Book website. There are several other websites that provide this free service, so you may want to compare and average the cost of your car from several sites to ensure accuracy.
Second, tally how much money that you spent on the vehicle for repairs and maintenance in the past 12 months, 24 months, and 36 months. Next, determine the average monthly cost of these repairs and maintenance for past 1 year, 2 years, and 3 years.
Third, go to a dealership and do some window shopping (looking without buying) to determine how much a new car that you would purchase would realistically cost you. Next, use an auto loan calculator to determine the monthly payments if you were to purchase the car.
Finally, compare the average monthly repair costs with the monthly payments of the new car. If the average repairs costs are more expense than the monthly car payments, then it is without a doubt time to purchase a new car. Since the costs of repairing an old car increases after time, use the 3 yearly average repair costs to predict future repair expenses. Using this new information, even if the average costs are about the same or slightly less than the monthly payments of a new car, then it probably is time to purchase a new car.
The last scenario is where most people get confusing and contradicting advice. This is when the average monthly repair costs are high, but still significantly less than the costs of purchasing a new car. For instance, letís say your car is worth $5,000, and you spent an average of $150 a month on the car for repairs during the past 3 years. That means you spent about $5,400 in 3 years on a car only worth $5,000, and those repair costs are probably increasing too. On the other hand, purchasing a new car will cost more than the $150 a month in repairs. The trick here is to determine when the future long term costs of repairing the car are no longer worth it. The general rule of thumb is to replace an aging car when 2 to 4 years of repairs are worth more than the cost of the car.
In actuality, this decision is completely subjective to the car owner. For instance, if a car owner is handy with minor repairs or does not travel much, then an older car can be kept for a longer period of time. On the other hand, if a more reliable or safer car is desired, then a newer car is typically purchased sooner.
Unfortunately, there is no magic formula to accurately estimate when an aging car costs more in repairs than it is worth. However, keeping a close eye on the average monthly repair costs helps to determine when to purchase a new vehicle.
by Phil B.