Mike Winters at CNBC wrote about how to know when it is time to replace a car, and asked me how to compare keeping the current vehicle against moving on once repair bills start to add up.
The mistake I see is comparing the wrong numbers. If you are still making payments, you are not comparing payment to payment. You are comparing total cost to total cost. An online loan calculator will show you the financing cost of a replacement, but the honest comparison is total monthly ownership cost on each side: the loan, expected repairs, insurance premiums, fuel and depreciation. A paid-off car with a $2,000 repair ahead of it is usually far cheaper to keep than a new car with a $600 payment, a higher insurance premium and its own repairs waiting three years out.
Two more inputs people forget. Any remaining loan balance on the current car, which either gets paid off or rolled into the next loan, and any trade-in equity, which offsets the replacement cost. Both change the answer.
The rule of thumb in the article is a reasonable starting point: when annual repairs approach the cost of a year of payments on a replacement, it is time to run the full comparison. Running it, rather than reacting to one bad repair estimate, is what keeps people from trading a fixable car for a decade of new payments.
Read the full article at CNBC →
