When weighing whether to buy a new car or keep your old one, the first thing you need to think about is that new cars lose a great deal of value when you drive them off the lot. The next thing to consider is that you'll have to make monthly payments unless you pay cash for the purchase. Those are the main risks. On the positive side, you will get safe, reliable transportation that can help you save money on repairs while the new car is under warranty. When you add up all of the different costs, you might find that you come out ahead with a new car. It all depends on the type of car you buy, the type of car you are leaving behind, and your financing terms.
Buying a new car typically involves two types of payment -- your down payment and your monthly loan payment, which includes principal and interest. It's possible to buy a car without making a down payment, but you will probably end up paying higher interest rates if you choose this option. While it's difficult to predict exactly what your car will cost you, to give you a baseline, a 60-month, $20,000 loan at 4.5 percent interest will carry a $372.86 monthly payment. Increasing the rate to 6.5 percent makes the monthly payment go up about $20. The amount of your down payment depends on how much you have in savings to put down.
New cars are usually more expensive to insure than old cars, but not always. First, if you aren't carrying "full coverage" on your old car, you'll carry it on your new car. Full coverage, also known as collision and comprehensive coverage, pays to repair or replace your car if you get in an accident, have it stolen or if something else happens to it that isn't caused by another driver hitting it through no fault of your own. As long as you are financing a new car, the lender typically requires that you have full coverage. Second, even if you are already carrying full coverage on your old car, your insurance costs will probably go up after you buy a new one since repairing or replacing a new car is usually more expensive than repairing or replacing an old one. On the other hand, if you go from a car that is likely to be stolen or is unsafe to one that presents less risk to an insurer, you could end up saving money. This would be the case if you trade in a flashy sports car with few safety features for a family vehicle with advanced safety features.
Gas, Oil and Maintenance
Depending on the car you buy, a new car can help you save money in some areas. For example, new cars are frequently more fuel efficient than older vehicles. If you pay $3.50 per gallon and go from a car that gets 25 miles per gallon to one that gets 30 miles per gallon while driving 15,000 miles per year, you'll save $350 a year on fuel costs. Some newer cars also have longer maintenance schedules, meaning that you won't have to take them in for as many oil changes or tune ups.
Repairs are where a new car can really save you money. Your warranty will cover certain repairs that you would otherwise have to pay out-of-pocket with an old car. Even after your warranty expires, your maintenance and repair costs should be manageable for the next couple of years because the car will likely have fewer miles on it than an older car you've had for a decade or so. As a general rule, the older the car, the more susceptible it is to breaking down or needing parts replaced. When you make the comparison between buying a new car and keeping your old car, don't just consider the cost of the repair itself. Think about additional costs such as having to rent a car while your vehicle is being repaired.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.