When Should You Buy A New Car?

There comes a time in everyone’s life when you must part with your current vehicle and buy a new car, truck, or SUV. Perhaps it will happen when you graduate nursing school. Or maybe you are just tired of driving around a clunker. In either case, nearly all nurses (or humans for that matter) will be faced with the decision of when they should buy a new car.

Recently I’ve been pondering this myself, and since we are just about to enter the period when most dealers start having their “end-of-year sales events,” I figured it would be worthwhile to weigh the pros and cons of buying a new car, and give a few calculations to help you crunch your own numbers.

So when should you buy a new car? Well, the answer will differ for different circumstances. My personal strategy is that for my daily driver (currently a 2003 Kia Spectra), I prefer to buy new, and keep until the repair costs add up to about the cost of a new vehicle. This usually equates to about 8-15 years (I’m almost at year 10 now, as of 2012). In terms of mileage, I’d consider getting rid of a vehicle at about 150,000-200,000 in mileage, assuming it still runs okay. If it starts having major issues before that, I’d ditch it sooner.

For my backup vehicle (currently a truck), I prefer to buy used, and keep it as long as possible since I drive it probably less than 500 miles per year. It is currently 14 years old, and I’ll probably keep it until it is around the 16-20 year mark. Then, I’ll just buy a newer truck that’s about 5-8 years old or so.

Nevertheless, this can be a rather complex topic to tackle, with a lot of considerations and variables in play, so this article will be quite comprehensive. If you’re currently pondering whether or not you should buy a new car, I hope you find this article helpful in some way.

I’ll start with some basic pros and cons, and then I’ll crunch some numbers of my own shopping experience.

Pros and Cons of Buying a New Car

First let’s start with the basics. A lot of people forget the nuances of owning a new vehicle, and some hidden fees can really add up. Also, people also tend to forget some of the perks of keeping their older clunkers. Here are the pros and cons of each:

Pros of Keeping Older Cars:

• Lower Insurance–Since the vehicle’s replacement value will have depreciated quite a bit, you can enjoy low insurance rates. And assuming you’ve paid it off, you can even drop down to mere liability insurance, which can save a small fortune each year (in the hundreds). Especially if the car’s value is rather low (say, less than $3,000). In fact, the insurance for my car and truck (liability only), is only $169.60 every 6 months. I have Geico in case you were wondering.
• Lower Property Taxes–Some states have property taxes on vehicles annually, so with an older vehicle it will drop your taxes a bit.
• No Car Payment–No car payments means you can save more for the future, invest your money, or live a more fun lifestyle. This is the biggest “money” factor of all, and by far this alone can make it worthwhile to hang onto your clunker for a couple more years.
• Less Worry About Loss or Damage–My poor Kia still runs well, but is in bad shape cosmetically. It has dents, dings, fading bumper paint, and more. So I have absolutely no worries that someone will scratch it, bump it, or even mildly wreck it. In fact, I probably wouldn’t even notice a difference, and I certainly wouldn’t care. With a new car, however, I’d be upset at the first tiny scratch.

Cons of Keeping an Older Car:

• Low Reliability–The older a car gets, the more likely that parts will fail. Some aren’t a big deal, while others can leave you stranded. Luckily, after almost 10 years of my car (and 103,000 miles), I’ve yet to be broken down on a road. But I also know that as time goes on, parts will fail. Eventually the alternator will fail, as will the starter, some random sensors, fuel pump, air conditioner parts, power steering parts, brake parts, and other parts. Eventually, a big ticket item (head gasket, engine, transmission, etc) will fail, which could cost thousands in repair.
• Boredom–Keeping an older car for many years can be plain boring sometimes. You tend to miss those new cool features, the new car smell, and having something you really enjoy driving. For me, the new car excitement was totally gone after about 5 years.
• Gas Mileage–Some older cars can be gas hogs. As gas prices continue to rise, this can eat away at your wallet.
• Emissions Tests–Some states have rigirous requirements of emissions and require testing. If your car doesn’t meet the guidelines, you could pay a fee.
• Safety–Older cars may not be as safe as newer ones that have the latest safety features. Things like air bags, crumble zones on the frame, and more can make a car much safer. Plus, since parts like a brake caliper may fail, or brake lines may leak in older cars, this also makes them less safe. Granted, this could happen to a brand new car, but it is far less likely to happen in a new car.
• Lifestyle Changes–Sometimes your lifestyle will change, and your old car won’t be a good fit. For example, perhaps you had a standard car, and now have 8 kids. Or perhaps you used to own an SUV, but now you drive a lot and the gas is starting to eat away at you. Or maybe you owned a truck to haul things, and now you’d prefer something smaller. In either case, the longer you keep a vehicle, the higher the chances are that it will eventually no longer fit your current lifestyle or needs.
• NO warranty–When your clunker breaks down, you usually have to pay out of pocket. That’s okay, since you probably don’t have a car payment. But it is nice having that peace of mind of a warranty to back you up.

Pros of Getting a New Car

• Excitement– Let’s be honest: There is nothing quite as exciting as buying a new (or newer used) car. It can be a lot of fun searching around, test driving, and so forth. It can be a very rewarding experience to own a new car. It can even boost your self confidence a bit.
• New Features–You can make sure to get all the important features you want when you buy new. You can choose between an automatic or stick, the color, and so forth.
• Fuel Efficient–Nearly ever new car will be more fuel efficient than it’s older models from a decade or so ago. Even trucks and SUV’s have made some progress compared to their ancestors. And sometimes fuel costs alone can amount to hundreds of dollars of savings per year (I’ll get to that more in the calculations).
• Safety–You can research safety ratings, and enjoy peace of mind knowing that you have all the latest safety features. Plus, the odds of a dangerous mechanical failure in the first few years are extremely low for a new car.
• Warranty–Most brand new cars have a nice warranty period, which will cover most repairs. This can range from 3 years to 10 years. My kia came with a 5 year total warranty, and a 10 year powertrain warranty. Sadly, since it is almost 10 years old, this is almost over. But a warranty can give piece of mind and cover any unexpected mechanical failures.
• Reliability–New cars are so much more reliable, and even comfortable to drive. They won’t have the quirks your old car has probably earned from miles and  years on the road. Plus, since every part is new, it has low chances of breaking down within, say, the first 5 years. Even if it does, it will likely be covered with a warranty.

Cons of Getting a New Car

• Costs– New cars ain’t cheap. The low end models still run around $14,000-16,000 once you add up all of the fees and taxes. And if you plan on getting a luxury car, van, SUV, or truck, bank on spending about $25k or more. Ouch. And if you have to finance, you will anywhere from a few hundred to a few thousand more (depending on your loan terms, interest rate, and price of the car). So this can prevent a lot of people from buying a brand new car. Granted, you can buy used, but in this economy, used cars are going for a premium right now, and sometimes the savings are minimal for a car that’s only a couple of years old. The way I look at it, I want something reliable for my daily driver–not something someone has possibly neglected a few years. I don’t want to get their problems!
• Opportunity Costs–Whether or pay cash or get a loan, you could have used that money to invest, do things around the house, or take a vacation. So you also lose the opportunity cost of what you could have done with that cash.
• Higher Insurance Costs–If you get a loan, you’ll have no choice but to get full/comprehensive coverage. This means your insurance costs could increase considerably. Even if you buy cash, you may still want to get full coverage to protect your new investment. Remember my insurance costs ($169.60 every 6 months) for my 2003 Kia Spectra and ’98 Dodge Ram 1500 truck? Well, if I drop the Kia, add a brand new Nissan Versa (one of the least expensive new cars), add comprehensive/collision with a $500 deductible, that makes my new insurance rate $410.90 every 6 months. Ouch. The upside is that if you do have full coverage like this, you probably won’t worry so much about dents and dings, as you can get them fixed (although they may increase your premium a bit).
• Higher Property Taxes–Again, if your state charges personal property taxes on things like your home, vehicles, etc.–you can end up paying higher in taxes.

When Should You Buy a New Car?

Well, I feel it helps to consider some of the qualitative factors as I listed above. Now let’s have a little fun and talk about some of the quantitative factors–and by that I mean number crunching. So when should you buy a new car? Let’s find out.

I’ll lay out a few basic formulas to help you get a feel for the current costs of your car, the annual costs of a new car, and allow you to compare those costs with the costs of buying a brand new one. Ready? Let’s do it.

The formula I’m going to use to determine my CURRENT yearly costs for my used car is this:

• Total original cost of the car (including interest charges/taxes/fees) MINUS any trade-in when you bought it
• + mechanical repairs or major maintenance 
• – current book or market value
• divide that by the number of years you’ve owned your car, then use this number to
• +  current annual insurance costs
• + any yearly property taxes on your car (I have none in my state)
• + estimated annual fuel expenses
• = average yearly car costs currently.

Don’t freak out! It’s not as complicated as it looks, and I’m going to walk you through it step-by-step to show you what I mean.  I bought my 2003 Kia Spectra brand new. The total cost (plus tax, doc fees, etc.) came to $11,300 (less about $5,000 trade from a past vehicle). I paid approximately $300 in interest over the life of the car, and I have no personal property taxes in my state. For major maintenance/repairs, only include things like replacing a timing belt, brakes, or a mechanical part that is costly. Don’t worry about small maintenance things like battery, oil changes, wiper blades, or tires since those will be needed quickly on a new car as well. I’ve had about $1,100 in repairs, which included a brake job, timing belt replacement, gasket, and a sensor.

The approximate current market value of my car is around $2,500. If you aren’t sure about yours, you can use an estimation tool such as Kbb.com to get the private party or trade in value.

As far as the fuel costs, that can be a bit tricky to calculate. I know by my odometer and driving mileage that I’ve averaged about 10,500 miles per year (105,000/10 years). I also know my gas mileage is about 28 miles per gallon (if you don’t know your gas mileage, use this site to estimate it). So to find my gas mileage I take 10,500 miles driven per year, divide that by 28 miles to the gallon my car gets, and that gives me 375 gallons of gas I’ve bought in a year (approximately). I can now multiply 375 gallons times my local gas prices (mine has been around $3.20) to get the estimated current fuel costs per year (mine is about $1,200 this year).

So far, my costs are:

• 11,300 (car cost)- previous trade in (5,000)=6300
• + 300 (interest)
• +  1,100 (major repairs)
• – 2,500 current value for trade/sell) = total of 5,200
• / 10 years I’ve owned it = $520 per year average car expense…plus
• + 339.20 (current yearly insurance rate)
• +  1,200 (current annual fuel costs)
• = $2,059.20

So $2,059.20 to keep my car on the road in its current condition. This is my approximate yearly operating cost of the vehicle at this time since I’ve bought it, with auto costs spread out over time plus the current insurance, fuel, and tax costs. Obviously I don’t fork out this much each year, as I’ve already paid it off. But by spreading costs, it gives me an idea of what I am really paying on a per year basis.

This is an important figure and it is important to note that this figure can and does changes each time a variable changes (such as keeping it another year), or if you experience a new repair. So you need to recalculate this annually to get the new figures. Obviously you need to plug in your own numbers to get an idea of what you’re spending on your car per year right (on average) now.

Okay, so let’s calculate a new car I’m thinking of buying. While I may wait 1-5 more years to buy a new car, it is tempting to buy the Nissan Versa, which is one of the most inexpensive new cars on the market right now.

The formula I’ll use for a new car is this:

• Total cost of the new(er) car (including interest charges/taxes/fees) – (less trade in from previous car)
• + mechanical repairs or major maintenance you may expect (discussed more below)
• – expected value at 10 years old (or whenever you plan to sell it)
• divide that by the number of years you plan to realistically keep the car, then
• +  add new annual insurance costs for the car (it helps to get a free quote)
• + any yearly property taxes on your car (I have no personal property tax in my state, some states do, some don’t)
• + estimated annual fuel expenses (using the MPG figures from the manufacturer, and formula I used above)
• = average yearly car costs.

Well, I’ve already estimated the total cost of a brand new Nissan Versa (with tax, title, etc.) to come to about $15,746. If I finance it, I may pay about $500 total in interest since rates are low and I can pay it off within about 2 years or so. It is difficult to know of any repairs you may face, but up until about 3-5 years, it will be covered under warranty anyway. I’ll estimate about $1,000 for repairs over a 10 year period, which mainly includes the final 5 year period. This is quite reasonable if you follow the maintenance regularly (which I always do). If you plan to keep it over about 10 years, I’d add about $500-750 average repair bill each additional year above 10 years, as parts will begin to fail around this time. You may want to increase to over $1200 a year for each year over the 15 year mark.

The new insurance costs I’d face are about $821.80 per year (410.0 every 6 months).

Regarding fuel, the new Versa is quite a bit more fuel efficient than my Kia. Assuming about a 36 MPG rate, my current annual fuel costs would be about (10,500 miles driver per year, divided by 36 miles for every gallon= 291.66 gallons per year). 291.66 gallons X 3.20 per gallon of gas=933.31 in fuel costs per year, which is a nice savings over my current fuel costs.

Okay, let’s plug in the numbers:

• $15,746 (cost of new Versa with fees/title/taxes)-2500 Kia value= 13,246
• + 500 (cost of interest if I finance for about 2 years and pay it off early)
• + 1,000 in repairs expected within a 10 year period (not including routine maintenance such as battery, oil changes, tires)=14,746
• – estimated value when you plan to sell (10 years, I estimate $3500 since it has higher resale than Kia)=11,246
• Divide that by the number of years I plan to keep (10 years, just like the Kia)=1,124.60
• + 821.80 (new annual insurance costs after buying)
• + 933.31  (estimated yearly fuel expense)
• =  2,879.71 (new average yearly cost for the new car)

A Few Caveats About the Formula

• I’m deducting trade in value from total purchase price for both my current car and the potential new car. If you want, you can forget about trade in values and just write the total cost you paid.
• This formula could also be applied to used cars that are a bit newer. Although I’ve used a new car in this example. Looking at the numbers helps a lot.
• This formula did NOT take into account the “opportunity costs” of getting a loan or buying a new car. You could keep your old car and use the funs to pay off high interest charges, or invest it. You may want to add this to the calculation.
• I made up this formula to determine the total cost paid towards a car, less prior trades and final sale value, spread out over the time of ownership. I feel this is an easier way to see the total cost of the car, which makes it a little more accurate to compare total costs. I then add the gas/insurance separately, because it better reflects your current total cost this way in my opinion.
• While it is possible a new car could be a lemon, warranty should help shield against it. If a car hasn’t shown a major problem by the time the warranty is up, it will probably last fairly well after that period until excessive age and mileage start to creep in.
• Now, some people may get confused, because they will finance a car and get a payment for $300 or whatever per month, and say, “hey, it’s costing me a lot more than that.” No it isn’t. You are forgetting that this is AVERAGE cost spread out over the life of the vehicle (with current insurance and fuel added in afterwards). So you will see a financial hit up front in the form of payments, but after 3-5 years you will have NO car payment. Keep that in mind. So it will be more expensive at first, but then level off.
• Insurance costs on a new car may come down after a few years. Also, you may even want to drop the comprehensive/collision after it reaches its minimal value, which could save more on a newer car.
• Estimated repairs on a new car are just that–estimates. However, I feel that if you buy a reliable brand, keep up with regular maintenance, you should make it to at least 10 years (or almost 150,000-200,000 miles) without a major repair. Beyond that time frame or mileage, you will likely face an expensive repair soon.
• The formula doesn’t account for any specials a dealer might run. For example, sometimes dealers run a “$5000 for your trade” deal, in which case I would get more for my vehicle.

Tips on Saving Money on a New Car

• Shop around and be patient. Dealers may have better prices, or offer incentives (such as cash back,$5,ooo for your trade, or other gimmicks that can save you some money). The best times of year to buy is in fall, end of year, and any holiday promotional offers (ie, labor day, etc).
• Use a credit card to finance part of it if you can. Why? You can get cashback rewards on your purchase. This is kinda like a free “coupon” off your car. Only do this if you can pay the balance off immediately (to avoid interest), or if you have a 0% rate on a credit card. And make sure they won’t add an additional processing fee too. Yes, you can buy a car with a credit card.
• Unless the dealer offers a high amount for your trade, then it is probably better to simply sell your old vehicle directly. You’ll usually make more money this way (again, unless they are running a gimmick of “$X,XXX for your trade no matter what”).
• Consider that you may be able to deduct sales taxes on your tax forms, especially if you itemize deductions. Also, occassionally the government will offer a tax incentive for buying a new car, so always check each year to see if any deduction is available.

Conclusion: When Should I Buy a New Car Now?

Alas, now we can compare figures to see when I should buy a new car. The Kia is costing me about $2,059.20 to operate right now on a yearly basis, while a brand new Nissan Versa would set me back about $2,879.71 per year over the time I would keep it (estimated). That’s not bad at all. So basically I could get a brand new car and only pay about $800 per year more than what I’ve paid for the Kia thus far.

Although I’m still not quite sold on whether or not I should make the leap. My frugal side says to try to stretch out the Kia for 1-4 more years and pray that it needs no major repairs, while my wild side says go buy a new car today. Like, right now!

What about you? Should you buy a new car? Well, financially speaking only, you shouldn’t get a new car until the costs of your old one in this formula match or exceed a new one, in my opinion. But people don’t base decisions soley on money, do we?

It would be cheaper to keep your current car in most cases (unless the repair bills are high, or the gas mileage is terrible). But sometimes there is more to life than money.

We could also save money by never getting our hair cut, only wearing hand-me-down clothing, living in a cardboard box, and eating nothing but canned tuna and rice. But life isn’t about  money all the time. We also must weigh financial decisions with emotional decision. We must balance qualitative issues with quantitative ones.

In my formula above, I can see that buying a new car anytime would be financially “okay.” It may cost a little more, but it also comes with more pleasure, perks, and safety.

If you are considering a new car, then I’d urge you to plug in some numbers and see what you get. Keep in mind you don’t necessarily have to buy a BRAND new car. You could use the same formula to estimate the costs for a newer used car as well.

Some people prefer to buy a car that’s about 4-5 years old, keep it for about 5-8 years, and then get a slightly newer car again. Others, like me, like to buy brand new and keep for about 10-12 years. Still others like to get a new car every 3-5 years.

It all depends on your financial situation, and your preferences. In any event, keep you eyes peeled for sales th