A topic that comes up fairly frequently in discussions (both in person and in my financial literacy class for educators) is when does it no longer makes sense to spend money to repair your existing car and instead purchase a new (or new-to-you) car. In the vast majority of these conversions a phrase similar to this one is uttered, “Well, it would cost more to repair it then the car is worth.” I think this is the wrong metric.
Instead, I would suggest the correct metric is, “How much does the cost to repair it compare to the cost to replace it with a new (or new-to-me) car.” The value of your existing car is (mostly) irrelevant to the analysis. You already own it and what you are really looking at is the cost of operating it (which, in this case, is the cost of repairing it and then operating it). So what you want to compare is the combined cost of repairing and operating your existing car with the cost or purchasing and operating a new (or new-to-you) car. Say your existing car needs $3,000 worth of repairs (just as an example) and is only “worth” $3,000. Some people would use that as a reason (excuse?) to get a new car.
But if they purchase a new car they are going to be paying a lot more than that (the average price of a new car in the U.S. is around $50,000). Even if they purchase a new-to-them used car, the average price of a used car in the U.S. is around $26,000 (obviously you can get less expensive used cars, and that would change the analysis accordingly). Also keep in mind that a newer car will have a higher ongoing cost for insurance, license and registration. Many folks will also end up financing that purchase so will also pay interest on top of that. And then there’s the opportunity cost of all those additional expenses compared to investing that money and having it grow exponentially over time. When you factor all that in, spending $3,000 to repair your existing car is frequently (but not always) the much better choice.
So when might it not be the better choice? Some of the other factors to consider include:
- Whether you anticipate that after spending $3,000 to repair it it will only last another year or so until it needs additional costly repairs.
- Whether the car is safe.
- Whether the car might frequently break down and cause you stress and inconvenience.
- Whether the amount you can get from selling (or trading in the car) is enough to lower the total cost of ownership of a new-to-you car to change the analysis. (This is where a less expensive used car could really change the analysis.)
- Whether the advantages of a new-to-you car (safety, functionality, lower fuel costs, “joy”) help offset some of the increased costs.
I started driving in 1980. Back then cars were much less reliable and didn’t last nearly as long. But today’s cars are much, much better, and should last at least 20 years (and maybe 30+ if they are an EV). We drove our 1995 Honda Civic for 22 years, then sold it to a friend for their high school children to drive to school and it’s still running at 31 years old (and had no really expensive repairs along the way). I fully expect our existing EVs (2020 and 2023) to last for 30+ years as well.
As a fun side calculation, if you do the math that means most people might only need to own 2-3 cars total in their lifetime.
As always, personal finance is personal. Everyone needs to think about their values and their goals and then make spending decisions accordingly. If the numbers, along with your values and goals, point toward replacing the car, then absolutely you should do it (assuming you can afford to). But you also need to be transparent and honest with yourself and make sure you are truly making the correct comparisons when making this decision, as well as factoring in the opportunity cost in light of your values and goals. I’m not suggesting you should never replace your car. But I am suggesting that lots of folks convince themselves they should when the actual math – and their own values and goals – doesn’t support that decision. So next time you are faced with this decision, consider using this approach instead of the flawed comparison to how much your car is “worth”.