When to junk a car

This guest post comes from Frank Curmudgeon at Bad Money Advice.

My basic advice on cars is that you should buy them mildly used, two to four years old, and drive them until they are inert heaps of rust. This is based on the commonplace observation that used cars are generally a better deal for buyers, that is that, relative to new ones, they are cheaper than really makes sense.

Whether this disconnect between new and used car prices is because consumers irrationally prefer new ones or irrationally fear used ones is a metaphysical question I am not going to answer. But the gap is there, and many personal-finance types will advise you to buy used rather than new because of it. I don’t disagree, but there is an equally important second principle to be drawn from the new/used price anomaly. Besides “never buy new” there is “never sell used.”

We can all probably agree that buying a car new and selling it used two or three years later is just about the most wasteful way you can own wheels. But buying it as a three-year-old and selling it at six is not that far behind. You capture the used car discount when you buy, only to give most of it back again when you sell.

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To fully reap the benefit of the (possibly irrational) discount on a used car, you need to never sell it. You need to drive it until it is all used up.

I do not think of this as a particularly fringe opinion. Yes, most people talk about the importance of not buying new rather than holding on until the bitter end, but it is not like driving a car for a long time is an obscure and subtle strategy that would occur only to an eccentric genius such as myself. People drive cars to the end of their useful lives all the time.

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So, you would think, there must be some sort of conventional wisdom on when to call it quits on a car and send it to the junkyard. If there is, I can’t find it. Search for “when to junk a car” on Google or Bing and you get dozens of answers on how to do it, including offers from towing companies and charities that will accept your clunker as a gift. (The best I could do was this.) I guess I will have to mint new conventional wisdom. You saw it here first.

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To begin with, there are sometimes moments when a car is obviously all done. The mechanic or body shop wants $4,000 to fix it but it would be worth only $3,500 when fixed. Or the government offers to buy it for more than it is worth.

But much of the time it is not so simple. I’ve got a 1998 Volvo wagon we bought new when Mrs. Curmudgeon was pregnant with what is now a sixth-grader. Best I can figure, in working order it is worth about $3,500. Last week the mechanic needed $2,400 to fix the steering system, which had essentially rusted away.

We paid for that repair, adding it to a long list of repairs of nontrivial cost that have been done in recent years. Although the drive train has never given us trouble, knock on wood, it seems as if everything else has been replaced at least once by now. It’s not that the car was poorly made. Thirteen Boston winters take a toll.

The Volvo has cost us $8,110 in repairs and maintenance over the past two years. Does it make sense to spend $4,000 a year to keep a car worth only $3,500 on the road? Sure. Why wouldn’t it?

That this is a good idea might strike some as odd. If you would junk a car if it needed a single $4,000 repair, why wouldn’t you junk it if you expected it to cost you about that much over the course of a year?

Because ditching the car that will be worth less after being fixed than it will cost to fix is something of a special case. If it will cost $4,000 to get a car to be worth $3,500, then the market value at that moment is negative $500. Junking it is, essentially, exercising your option to sell it for $0. Since $0 is greater than -$500, walking away is, at that moment, the wealth-maximizing move.

However, if you have a $3,500 car that will require $2,000 in repairs every six months, there will never be a point at which junking the car makes sense. Twice a year the car will be broken and be worth $1,500. Selling it then for $0 would be irrational.

Moreover, $4,000 a year (gas not included) to keep the car going sounds unreasonable only when you compare it with the market value of the car. Actually, it is not a particularly bad deal. Were I to upgrade to a ‘08 Volvo wagon (and this being Volvo the cars are nearly identical) I probably wouldn’t visit the mechanic much, but it would depreciate in value by nearly $4,000 a year. The ‘98, on the other hand, is just about done losing value to age.

The answer might be different if the annual repair cost were, say, $6,000, but under those circumstances it would be pretty likely that a single repair bill would exceed the car’s value in short order. So perhaps waiting for the moment when it would cost more to repair than it would then be worth is the best strategy after all.

There you have it, folks, new conventional wisdom: Buy used, drive until the value is negative.

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