Four years ago, Richard Bagozzi thought his new Chevrolet Cavalier station wagon would last seven or eight years. Now he’s not so sure. Rust is showing up along the bottom of the door panels.
The seat belts are balky. He’s afraid the car may not make it another three or four years. So the Ann Arbor, Mich., college professor is faced with a common dilemma. Should he gamble that this car will last or should he take on the expense of a new car?
Bagozzi will spend less running his Cavalier than he win buying a new car. Insurance premiums on older cars are lower, as are registration and property use fees in some states. And although conventional wisdom says you shouldn’t throw money into a depreciating asset, it’s often cheaper to pay for repairs on an old car than it is to buy a replacement car. “If it’s economically feasible for somebody else to rely on your old car, doesn’t it make sense to keep it yourself.?” asks John Fobian, an automotive consultant and former director of engineering for the American Automobile Association.
WHEN YOU COMPARE COSTS
Ownership costs-such as depreciation, finance charges, insurance, registration fees and taxes-typically fall as a car ages. Operating costs-gas, off and, particularly, maintenance and repairs-typically rise. Sentiment aside, to figure out whether to keep your old car, first estimate how much your costs would be over the next four years. Then compare those expenses with the estimated costs of buying and running a new car, says John Burton, a professor of consumer studies at the University of Utah, in Salt Lake City. The results can be startling. “My 1983 Nissan with 100,000 miles costs so little to run at this point that I can’t afford to get rid of it,” he says.
Suppose you own a completely paid-off American-made, four-door sedan with a six-cylinder engine. It cost $10,278 new four years ago and is now worth $4,455. You decide to sell it and apply the proceeds toward a down payment on a new four-door sedan costing $12,669, leaving a balance of $8,214, which you will finance at 12% interest.
If you drive the new car 15,000 miles a year for four years, your projected cost-including financing, taxes, fuel, insurance and maintenance-would be 23.4 cents per mile, according to Runzheimer International, a management consulting firm. The cost of keeping your old car over the same number of years would be only 12.7 cents per mile. Over the four-year period, you would save roughly $6,400 by keeping your old car. At that rate, you’re saving too much to sell.
Calculating Cost Of Ownership
One of the most important considerations with an old car is whether your ownership costs will indeed head down over the next four years. Some things to look at:
* Depreciation. This varies widely from car to car and doesn’t move in a straight line. The loss is usually greatest in the first few years, then it levels out. A 1990 Oldsmobile Toronado, for example, is expected to lose 64% of its value after two years, then an additional 13% in years three and four combined, according to GE Capital’s Automotive Financing Handbook. So in four years, the car, which costs $25,000 new, would be worth $5,750 on the resale market-23% of its original cost. Bagozzi’s four-year-old Cavalier is now worth only 24% of what he paid for it in 1986. If he keeps the car, he can spread the depreciation over several more years, thus lowering his overall expense of ownership.
Other cars do much better. A four-year-old Honda Prelude S, for example, retains 52% of its original value. Hondas in general do well; the Honda Accord and CRX are worth 47% and 43%, respectively, of their original value after four years. Among the highest-value midpriced cars after four years are the Acura Integra 47%); Nissan Maxima 43%); Toyota Camry 43%); Volvo 240 43%); and Mitsubishi Eclipse (42%).
European luxury cars retain the highest values as a group. For example, the Porsche 911 retains 49%; the BMW 525i, 47%; and the Mercedes-Benz 300E, 47%. Unfortunately, American luxury cars don’t do as well. The Lincoln Continental retains only 34%; the Chrysler New Yorker, 28%; and the Cadillac Eldorado, 27%.
You can check the value of comparable used cars in newspaper ads or used-car guides (available at many libraries) or at banks. To get an idea of how much depreciation has cost you, subtract the used-car value from the price you originally paid.
The rule of thumb here: Cars with the highest retained value give you the most money to roll over into a new car. Cars with the least retained value are top candidates for keepers-unless you have reason to believe your operating costs, discussed below, will skyrocket.
* Finance charges. You owe interest on the unpaid balance of a car loan. As a result, substantially larger portions of your payments go for interest in the early months of a loan. The result is a slow buildup of your equity. For that reason, it doesn’t make economic sense to sell a car when you’re “upside down” on the loan-owing more than the value of the car.
* Insurance. A car usually becomes cheaper to insure as it depreciates. Your collision and comprehensive insurance costs should drop by 14% over the second four years you own a car, estimates Runzheimer. While finance companies frequently require you to carry insurance to protect their interests, once the payments end you are free to restructure your coverage.
“Some people carry collision insurance no matter how old the car is, just for peace of mind,” says Steve Gross, editor of the Complete Car Cost Guide. But most owners of cars originally priced under $12,500 drop their collision coverage after five years, says Gross. Most stop at six years for cars costing up to $17,500; seven years for cars up to $24,000; and nine years for automobiles up to $40,000. Owners of the top-price cars tend to keep collision coverage for the fife of the car.
* Taxes and registration fees. Many states charge lower fees on an older car. Registration fees decline with the age of a car in California, Colorado, Idaho, Iowa, Michigan, Minnesota, New Jersey, Nevada, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wyoming. The state of Wyoming, for example, sets a $15 registration fee while local jurisdictions add a charge based on the declining percentage of the car’s original value. For a $12,000 car, the add-on fee can range from a high of $216 to a low of $54 a year, depending on how old the car is.
Where automobiles are taxed as personal property, you can pay much less as the market value of the car declines. In Kansas City, the personal property tax on a four-year-old Ford Taurus station wagon is $359. For a brand-new Taurus, it’s $866.
Five states-Colorado, Maine, Massachusetts, New Hampshire and Washington-levy similar taxes, which also decline with the value of the car.