When to trade in my car for a new one?
January 30, 2012 10:32 AM   Subscribe

Help me determine the optimal time to trade in my car for a new one.

I'm thinking about buying a new/used car. If I did, I'd trade in my current car. I'm trying to figure out the most cost-effective time to trade the car in. In doing so, I've come up with the questions below. I'd appreciate answers to the questions, as well as reasons why this thinking is wrong (like costs or benefits I'm failing to consider).

1. Assume I have sufficient cash on hand to buy whatever car I want outright. Assume my current car has a trade-in value of $10,000 (disregarding whatever games that would be played by the dealer; just assume that if I bought a $20,000 car and traded in my current car, I would have to pay $10,000 in cash to drive the car off the lot).
2. Assume that I don't trade in my car now, and tomorrow, my car suffers some problem that would cost $1,000 repair.
2a. Assume I don't repair the car. Is its trade-in value $9,000, or less? Or more?
2b. Assume I do repair the car. Is its trade-in value back to $10,000, or is it less? Or more?

Basically, I'm trying to determine what reasons there are for not trading in a car now, when its trade-in value is highest. I know there's a big outlay of cash to get a new car, but is this offset by not having to pay for repairs on the old car and having more trade-in value/MPG efficiency/whatever on the new car? In case it's helpful to get out of the theoretical, my current car is a 2005 Jetta with approximately 75,000 miles.
posted by jalexc to Travel & Transportation (7 answers total) 2 users marked this as a favorite
2a. Its trade-in value is less than $9k, because the $1k repair is only the cash cost, not opportunity costs (time to take it to the shop, deal with paperwork, etc), dealer will be less interested in car (lower demand=lower price) and it may be impossible to evaluate the car completely before the repair is done (higher risk for dealer buying broken car).

2b. Depends on the repair.

Single expensive repairs don't indicate you should get rid of a car unless the cost of said repair exceeds the car's value (in which case it's junk, not a trade-in). The best way I've come up with for deciding when to change cars is to estimate or keep track of the car's cost per month (both repairs and depreciation) averaged over the entire time you've owned it, and track whether that average is going down, fairly flat, or climbing. Transaction costs (sales taxes, dealer profit) will cause that average cost per month owned to be very high when first purchased, but drop sharply as those initial costs are spread over several months of ownership (dropping averages costs = keep the car). Maintenance costs will soon kick in and level it off (flat average costs = keep or sell, whatever you feel like). More expensive, late-life repairs will eventually start to drive it upward (rising average costs = sell). This is not a perfect method, but it's a lot better than rules of thumb like, "A used car is always cheaper than a new one," which is just wrong.

My 2001 Jetta, which I sold a couple of years ago, started getting more expensive at around 90K miles, but I was doing many repairs myself and paying only for parts. Had I been paying professional garages to do all the work (or valuing my time more highly), it might've been time to dump it sooner.
posted by jon1270 at 11:07 AM on January 30, 2012

keep track of the car's cost per month (both repairs and depreciation)...

That should read, "keep track of the car's cost per month (payment, repairs and depreciation)... "
posted by jon1270 at 11:14 AM on January 30, 2012

Car salesperson here.

It would of course depend on the dealer, but if the dealer plans to resell the vehicle they're going to be doing a whole crapload of repairs on it anyway. Dealer cost on repairs is less than your retail price, so your trade should be worth more than $9000, if the dealer plans to resell.

Paying to have it fixed only to trade it in right away isn't your best financial option. But if there's a repair needed, get an estimate of the amount first (third party) so you're ready for the lowball trade offer.
posted by GhostintheMachine at 11:22 AM on January 30, 2012

2a. Depends on the problem and to whom you sell it. (Trivial things can be repaired by the dealer below your cost because they can often get the parts cheaper, etc.)

2b. Depends on the problem. Simple things (say, a flat tire) don't change the value. Things that may have caused hidden damage (blowout that took you into a curb) somewhat lower the real value.

(To a first approximation, it never saves you money to replace a car you own with a new car. If you work out the numbers, you can pay for an awful lot of professional repair and rebuilding with the real cost of a new car. Now, there may be other reasons to replace an old car, but money is almost never one of them.)
posted by introp at 1:42 PM on January 30, 2012

I know there's a big outlay of cash to get a new car, but is this offset by not having to pay for repairs on the old car and having more trade-in value/MPG efficiency/whatever on the new car?

Click and Clack once did a cost comparison on the total cost of ownership based on buying a new, 3yo and 7yo car. The new car was a big outlay but had only minimal expenses for the first few years. The 3yo was notably less but some average costs. The 7yo was quite cheap but had bigger repair costs.

Their determination was that the 3yo was the best deal as far as average yearly costs. However this was over 10y ago and before the current era of almost free loans. New cars lose a tremendous amount of value in their first year so I am sure it's still cheaper to get the 3yo but probably not as much so.

If your 2005 is free and clear then I don't see any way, from a pure dollar calculation, that sooner is better than later. Even if you actually are paying cash you're still losing the investment value of that money and won't have it around for other opportunities.

Put even that aside; If your car is losing trade-in value at a rate of $1,000 a year that means you lose $83.33 a month. Is there any calculation under which you aren't spending more than that for this replacement vehicle? If you buy a replacement for $10,000 and keep it 5 years that's still twice $83 a month, assuming 0% interest.

The repair risk is harder to quantify but still seems unlikely to make up for the increased costs. Plus, if you're not looking at a new car then you're presumably only going to have a short period of warr coverage; that won't be a differential for very long.

I'll admit my bias that I think the only sensible way to spend on cars is to pay cash and drive them till they die. Anything other than that is a luxury choice. Which is fine, but I don't think it should be thought of as anything other than a "I spent it because I want to" decision.
posted by phearlez at 2:30 PM on January 30, 2012 [1 favorite]

Might be best for you financially to buy your new car and sell the old one in separate transactions. That way you'll avoid dealer shenanigans on your trade in (i.e. full price on trade in but ripped off on new car, financing, and undercoating) and you can try to sell it yourself for more.

If it doesn't sell you can always sell it to carmax. You might want to go there first anyway to see what it's worth so you'll know how bad the dealer's low ball is.
posted by just sayin at 4:06 PM on January 30, 2012

If you buy a replacement for $10,000 and keep it 5 years that's still twice $83 a month, assuming 0% interest.

Only if it's worthless after 5 years, which is not a realistic assumption. If it's worth $5k after 5 years, then the cost was the same as the older car, and you were driving the newer, nicer, more reliable car that whole time. Changing interest, maintenance and depreciation costs make it significantly more complicated of course, but after a careful analysis of my last car I'm convinced that phearlez's drive-it-into-the-ground bias (which I used to share) is often wrong.
posted by jon1270 at 3:58 AM on January 31, 2012

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