For most people cars are a necessity. They can also be huge headache.
If you own a car it’s inevitable that you’ll someday face a stupidly expensive repair bill.
When we got married my wife drove a 1996 Eagle Talon. Don’t tell her I said this, but it wasn’t the greatest car. It was a bit of a beater. But it was paid for.
One day I’m sitting at work and I get a call from my wife.
Hey – I was driving though the intersection when my car made this loud bang and now it won’t start.
I leave work and head towards where she is now stranded. It’s about a 20 minute drive the whole way I’m running everything though my head that it could be and figuring how much it was going to cost us.
I get there, take one look at the car and know exactly what it is. The water pump died which caused the car to overheat which caused the engine block to crack – leaking antifreeze all over the concrete. Bad news. Real bad news.
To make a long story short it was going to cost $2,500 to fix and the car was barely worth that.
Do We Fix The Car or Buy a New One?
We had to make a decision. Do we fix it or do we cut out losses and find a new car? If we shell out the money to fix it, who’s to say that next week it’s not back in the shop with something else wrong? Then what?
On the other hand, we could pay to fix it and the car could run fine for the next 5 years.
So what do you do?
We trashed it.
My rule is if it is going to cost more to fix than the car is worth then it’s not worth it to fix. I just can’t see putting $2,000 into a car that’s only worth $2,000. Once it’s fixed it isn’t going to suddenly be worth $4,000. More-than-likely its still only going to be worth $2,000.
Have a car that’s worth $15,000 and needs a new transmission? Pay $2,000 and get a new transmission. That makes sense. Have a 1992 Honda Accord that’s worth $800? You would be throwing your money away on a new transmission.
So what do you do if you have a beater that needs $1,000+ in repairs?
The Financially Smart Answer
Buy a new beater!
Beater cars are like diapers – they’re disposable.
If you are working to get out of debt or if you’re debt free but don’t have the cash to buy a nice car outright – the smartest financial move is to buy another throw-away car for a couple thousand dollars and drive that for the next two years.
The Realistic Answer
I’m a realist. I know that the financially smart answer doesn’t work for everyone. Sometimes a $2,000 car won’t cut it. If you have to travel for your job, the last thing you need is to break down on the side of the road 250 miles from home. And there are a dozen other cases where you need a good reliable car. (Just FYI, being embarrassed to drive an old car isn’t one of those cases.)
For us, my wife was in school and I worked on the other side of the city. I also had to travel occasionally with my job. The last thing we needed was another car that might break down.
We decided to buy a newer car which meant we were going to have to take on a new car loan (ugh…)
My Rule For Buying A Car When You Aren’t Paying Cash
If you have to buy a new car, but can’t pay in cash there are a few rules you should follow.
First, don’t buy a new car. A new car depreciates 15% to 20% in the first year. Buy a used car that is 2 – 4 years old with no more than 15,000 miles per year. (i.e. If the car is 3 years old it shouldn’t have more than 45,000 miles on it.)
Second, the loan should be for no more than 36 months and your payment should be no more than 10% of your take home pay.
For example, if your take home pay is $4,000 per month then your car payment should be no more than $400 per month when financed for 36 months. That gives you around $13,000 to work with. You can easily find a nice used vehicle in that price range.
Now here we are 3 1/2 years later with a paid-for car that will last us a good 8-10 more years.
What would you do if you were faced with this decision?