How do you know when buying a new car in Australia will be better for you than maintaining your old vehicle?
Making the call in such a situation doesn’t need to be so hard. Surprisingly, many people hesitate and find it a difficult thing to do. That happens when you don’t know where to start.
It all boils down to crunching some numbers, considering your personal situation, and asking the right questions.
Two Questions to Ask Yourself Before Buying a New Car
Many people ask, “Is it worth buying a new car?” A yes or no answer can be rather flippant without a solid defence behind it. The truth is, it’s not as easy as a yes or no.
So, instead of stressing yourself with this dilemma, you should be asking the right questions to get an intelligent answer. You’ll need to sit down to answer these two guide questions, which I promise will lead you to the answer you need:
1. What’s the cost of owning and running your car?
Get a calculator, a pen, and a sheet of paper to compute how much you spend monthly to own and keep your car running.
List down how much you pay for the following:
- Monthly amortisation – the amount you pay to the car dealership or the bank if your car is not fully paid yet.
- Registration – the total amount (annual) divided by 12 (to get the monthly equivalent)
- Insurance – same as the car registration fees
- Fuel – your car’s monthly average fuel consumption cost
- Maintenance costs – your average monthly expense on regular servicing and repairs/parts replacement based on your receipts and record
- Depreciation – as you should know, a car depreciates (or loses value) every year the moment you drive it off the dealership’s car lot at an average of 15% of its initial value per year. Depending on your car’s make, model, MY, and several other factors, it can be anywhere between from 10% and 25%. If you don’t understand this item, don’t let it bog you down. Just skip it for now (I’ll explain below).
Next, add all the costs you have listed.
With that total, let’s compare two situations.
A. If you fully own the car (fully paid, that is):
The only things that you pay for are registration, insurance, fuel, repair and maintenance, and depreciation costs. Compared to buying a new car:
- You have no monthly amortisations to think of.
- The amount you spend for registration, insurance, and fuel will not differ substantially if you bought a new car.
- Depreciation cost will be less for the older vehicle.
- Regular servicing cost will be roughly the same.
- Repairs and replacement parts will cost more for the older vehicle.
As you can see, if you keep your car, you will likely spend more for repairs and replacement of parts, but you'll do away with a major headache – monthly amortisation.
Even if you spend a few hundred dollars every few months for repair and parts, that’s still considerably less than the monthly amortisation on a new car.
In short, if you already fully own the car, keeping it will be healthier for your pocketbook than buying a new one. In this case, better keep your old car.
B. If you’re still paying for your old car:
What if you’re still paying for your old car? Then the picture can change.
- The monthly amortisation for your old car will possibly be similar to paying monthly for a new one.
- Registration, insurance, fuel costs, and regular servicing will still be around the same figures, whether you’re buying a new car or keeping the old one.
- Depreciation and repair costs may differ slightly. For the older vehicle, depreciation may be lower; repair cost will be higher than that of a new car.
If you were to spend similar payments for an old car and a new one, with the old one incurring high repair costs, it looks like it would be better for you to get a new car (or trade in the old car for a new one).
However, in Situation B, we assumed that you will be spending much for repairs and replacement parts. What if that's not the case? Here’s the second question to ask.
2. How much do you spend for repairs and auto parts?
One of the likeliest reasons you’re considering buying a new car is the high cost of maintaining your old vehicle, especially when it comes to repairs and auto parts.
So, it all boils down to this: Are the repair costs so high that it’s worth buying a new car? An easier way to answer this question truthfully is to consider the following situations.
A. If you fully own the car, and:
- The monthly repairs are less than half the monthly payment for a new car – you’ll be living comfortably with no liabilities (more about this later) and the repairs are manageable, so be contented – keep the old car and gladly pay for the repairs.
- The repairs are lower by some months, say 3 months of car amortisations, and you know that your old car can go around 6 months) without requiring repair or maintenance work – then that’s fine too – keep the old car and pay the repairs with a smile.
- The repairs every couple of months exceed a month’s amortisation for a new car – that would be very expensive to sustain. Start filling out that form to buy a new car.
- The average total yearly repairs are lower than half the market price of your vehicle – if the previous year, your mechanic charged you with a total repair cost of $1700 including parts, and your car has a $4500 market value, then it will still be a wise move to keep your car and maintain it.
- The average total yearly repairs are higher than half the market price of your vehicle – in the above example, if your car is worth $2200, then it’s a losing battle. Part with your car, consider buying a new car, and start a new life.
Find valuable info from this article about used car market value. To find the resale value of your car, you can search for car market value calculators online.
B. If you’re still paying for your old car, and:
- You’re less than a year away from fully paying it, and monthly repairs are less than a quarter of a new car’s monthly amortisation – you’ll be debt-free in less than a year, and you may not want to enter another major medium-term liability. Defer buying a new car for a couple more years.
- You’re several years away from fully paying it, and monthly repairs are more than half a new car’s monthly amortisation – this will slowly become a stressful affair, and it is when buying a new car can be a smart move.
As you can imagine, there are more situations than what this article covers, but you get the gist.
Other Things to Consider When Repairing an Old Car
1. Repairs that add value to your car – some major repairs can add to the lifespan or value of your vehicle. As long as the repair is something that does not occur repeatedly and will extend the vehicle’s life by some years, then it is totally sensible to have the repairs carried out.
2. Car recalls – before you proceed with having any car repairs carried out, find out recalls made for your car. You shouldn’t spend valuable money to pay for repairs and car parts that you would have gotten from your dealer for free.
Bottom Line – To Buy or Not to Buy a New Car
If you have the money to comfortably buy a new car, then this post wouldn’t have been a very lengthy exercise to write or read.
You can trade in your old car and get a new one – it’s a no-brainer. However, not all people have that luxury. They'll have to think about a lot of things, including the following.
Liabilities
I’ll keep this short so that I don’t scare you away.
All we’ve talked so far was cash flow – Is the cash flowing in (your income) monthly enough to cover the cash flowing out (your expenses) for the same period? What we have not talked about are assets (what you own) and liabilities (what you owe).
By getting a new car under a new financing scheme, you’re increasing your liabilities or debt. For some people, it spells the difference between sleeping like a baby and staring at the ceiling at night.
Depreciation
Also, a new car depreciates the fastest in the first 5 years. So, if you buy a new car, you need to know that it loses value fast during that period. In comparison, it is assumed that your older car now depreciates at a slower rate. The fact, however, is that depreciation depends on other factors, including make, model, MY, your driving style, and many more.
Rounding Up
The point is, if driving an old car remains feasible for you (like the different situations we’ve underscored above), then you’re better off keeping it for some more years. You keep liabilities and depreciation expense low.
You should only seriously consider buying a new car when the situations become untenable and impractical (also underscored in two situations above) to hold on to your old car.
I hope you found this helpful. If so, we’ll appreciate if you could share it with friends and family. We also invite you to read more of our blog articles here!