When Should You Trade In Your Car? Don’t Listen To What Others Say – Run The Numbers Yourself

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A reader writes in describing a debate she’s having with her husband:

I’m not sure but someplace on your site I think I saw something about how often to trade in your old car. Our SUV is a 2005 with 55,000 miles on it. My husband says its time to trade it in. He says the longer we drive it the worse off we will be. I’m not so sure. We will pay cash for the difference if we trade. Can you give us any pointers?

The husband’s philosophy, if I understand it correctly, is that the older a car is, the less trade-in value it will have – and that’s absolutely correct. An older vehicle will have less trade-in value.

But let’s look at some real numbers. Let’s look at the trade value of Dodge Durangos (they have a SUV, after all) from 1998 to 2006 and assume the median of the range given.

A new midrange 2008 Dodge Durango, according to AOL Autos, costs $31,835. Let’s just assume this is the price one would have paid in earlier years for a Durango. It may have been less, but probably not significantly so.

A 2006 Dodge Durango would have been owned for 24 months and would have a cash value of $18,225. This is a total depreciation of $13,610, or $567 a month for the entire time of ownership.

A 2005 Dodge Durango would have been owned for 36 months and would have a cash value of $14,062.50. This is a total depreciation of $17,772.50, or $493 a month for the entire time of ownership. Over that last twelve month period, the vehicle only depreciated $4,162.50 – or $347 a month.

Let’s keep going for two more years so the picture becomes clearer. A 2004 Dodge Durango would have been owned for 48 months and would have a cash value of $12,500. This is a total depreciation of $19,335, or $402 a month. Even more impressive, over that last twelve month period, the vehicle only depreciated $1,562.50 – or $130 a month.

A 2003 Dodge Durango would have been owned for 60 months and would have a cash value of $10,512.50. This is a total depreciation of $21,322.50, or $355 a month. Again, over that last twelve month period, the vehicle only depreciated $1,987.50 – or $166 a month.

What’s the meaning of this data? The longer you hold onto a car, the less it depreciates each year, and thus the more cost-effective it becomes. A 2003 Durango has a trade value much less than a 2006 Durango, but if you break it down into the depreciation per month, the person owning the 2003 Durango lost much less money per month than the owner of the 2006 Durango.

Another thing to notice is that car depreciation is at its worst during the first few years of owning a car. Thus, to maximize the bang for your buck, your best bet is to buy a model three or four years old. That way, it doesn’t depreciate thousands of dollars each year you own it.

What’s the conclusion? The best value in cars is buying a late model used and driving it until the repair bills start seriously racking up. This plan minimizes the per-year cost of your car and gives you the most years of cost-effective reliability. If you insist on buying new (not the best move), the more years you drive your older car, the more cost-effective your purchase becomes.

Upgrading a three year old car to a new model is not cost-effective in any real way – the only advantage it provides you is the prestige of constantly having a new car at the cost of many hundreds of dollars a month versus using a more cost-effective method of getting around.

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30 thoughts on “When Should You Trade In Your Car? Don’t Listen To What Others Say – Run The Numbers Yourself

  1. i think the husband was referring to the expense of maintaining an older car vice depreciation of the car. 60k is the major maintenance in most cars (brakes, tires, first major scheduled maintenance, etc, etc).

    The longer you hold the car, the less you need to really worry about depreciation. especially if you are keeping the car until it dies or nearly dies.

    there is no hard and fast rule as to when it is a good time to trade in a car, because it depends on many variables like depreciation and maintenance costs. However, you should not trade in a car if you are going to go upside down on a loan.

    the thing you should look at is the maintenance cost of the vehicle. if the car has been a reliable one, then why would you get a new/different one? a new one under warranty provides some level of confidence, but you could end up getting one that needs to be in the shop a lot even if new.

    so, i say keep the car if it has been reliable, maintain it (preventive maintenance is very crucial in mechanical things). If you find out that the cost of maintaining is higher than what you want to continue paying, then get rid of it. if the car doesn’t meet your needs, then get rid of it.

  2. My 96′ Regal has over 180K miles and still going strong. When it breaks for good I’m going to buy another one :)

    55k is low mileage, the husband just wants a new ride.

  3. Javi, on the other hand, the husband drives A LOT. There is something to be said about paying for luxury, and they need to make that decision. If I’m in a car for 2-3 hours a day, every day, it might be worth getting one that makes you comfortable. In addition, with him driving that much, it’s probably worth downgrading to something not-truck just for gas savings. Remember, as long as you budget for it, luxuries aren’t an evil thing, and only the end user can decide where they want to put their extra money. It very well might be worth it for the husband to get a new car, over going on vacation, or getting new carpet, or whatever the alternative would be.

  4. Re: daub815′s comment.
    Thats a great chart. I would bet that Honda’ civic depreciate less than most cars, so the overall cost difference is actually minimized a little bit.

    During my recent car shopping, I found used cars with good track records (hondas & toyotas) sold at quite a premium, which led me to buy a new Accord. I just hope that I can be one of the 200K mile stories.

  5. For me financing a purchase that is depreciating while I’m paying interest on it isn’t a great deal. If they can hold onto the vehicle until maintenance costs would justify buying another vehicle would be the way to go.

    No mention if the current vehicle is paid for or not. Why start over if you don’t need to?

  6. Trent, as the first commenter points out, your decision should factor in the maintenance cost of an aging car. My wife drives a Lexus, I’ve always driven BMWs. The Lexus has proven to be extremely reliable. My BMWs a little less so, and while they are very reliable compared to other brands, on the few occasions that my previous, aging beamer required work (clutch, steering, electrical), it amounted to a lot of coin. The factory warranty on my current beamer just expired. It is an exotic model, and has never failed me, but lets just say that I do not look forward to *anything* breaking down! The factory warranty/service cliff for this kind of car (typically 5 years) is a major decision making point. For the first 5 years of ownership, you have fixed maintenance costs. After that, you roll the dice. One to two major repairs per year probably offset the loan interest on a newer model? I haven’t done the math – would love to hear your take.

  7. kman, The post said that they would pay cash for the difference between the new car and trade-in, so I think its safe to assume that the current car is paid for and that they are reasonably affluent. That said if they have the money to pay the difference, then there is also the opportunity cost of not investing that money.

  8. You should have also included how much return one would normally get investing that money wasted in depreciation in the stock market. This way people really understand how much money they are losing buying a new car every 2 years.

  9. Click and Clack said it best; until your frame starts rusting out it’s almost always cheaper to repair your existing car than to buy a new one. I mean, unless your repair bill is getting to be more than $400/month you are saving money (of course, you need to take into account any inconvenience, too).

    But, just because the car is a few years old? My Saturn is eight years old and has a trade-in value of about $4000. If I’d bought a new one 4 years ago I’d be out $10-12K for the new car and have a 4 year old car with a trade-in value of about $6000.

    Can I afford a new car? You bet. Do I have better things to do with $10K? You bet. If you want a new car, fine. But don’t try to say it’s a financial decision.

  10. A 2005 vehicle is NOT an old vehicle, and there’s no reason to trade it in beyond the “itch” to drive something brand new. Financially, trading in a 2005 vehicle is a lousy decision.

    Of course, the more people trade in vehicles that are around 3 years old, the more late-model used vehicles there are for me to pick from. :-)

  11. Good demonstration!

    Possibly depending on the state you live in, another thing to consider is how much it costs to register the beast. In Arizona, that drops year by year as the car ages. When my 2000 Toyota Dog Chariot was new, I had to raid a mutual fund to pay the registration (OK, it’s the Vanguard fund where I keep my car savings & so that’s part of what the money is FOR, but still…the cost of a year’s registraton was more than I could pay out of my salary). Seven years later, the cost has dropped enough that I easily can pay it out of my cash flow.

    Stupidly, I’ve always bought new cars. But never again. If you live near a retirement community, you can get a great low-mileage, gently used car–much nicer than anything you would find in the larger community–for a fraction of what it would cost new. It’s worth driving across the state to buy your car from the old folks.

    But I’m hanging on to the Toyota till it dies. Yeah, I had to pay a chunk for the 60K maintenance. . .but that was a far cry from the 15 grand (on top of this car’s trade-in or sale value) I’d have to pony up to buy a new car. And the car still runs trouble-free.

  12. benp, you also need to consider that a civic and other high volume cars have higher insurance due to them being stolen more often.

    55k on a 2 year old or less vehicle is a lot of miles. figure mostly highway miles which is a good thing; however, despite being a relatively new car, being an SUV and paying gas for those kinds of miles is ludicrous. i would get a different vehicle simply for the better gas mileage as Chris posted.

  13. 55K mileage is nothing. My Honda is at 112K and runs beautifully–no repairs ever needed (though I am expecting it so have some money saved in case). I know someone whose car has 180K and has spent less than a thousand over the past 10 years in repair costs.

    However, the only reason I see trading in the car is switching to a compact or hybrid to save on gas. My sis has an SUV and is considering trading it in so she can buy a prius because she is a major commuter.

  14. @Tim,
    Thats a good point about insurance but my intuition says that insurance differences are probably significantly less than the depreciation differences. Do you have any experience with the numbers.

    Civics are also cheaper cars, and depreciation is somewhat proportional to car cost (ie expensive cars have higher absolute depreciation losses).

    I would also agree that the gas mileage argument is pretty compelling, although I would like to know the purchase month, a 2005 car could be almost 3 years old.

  15. One thing I didn’t buy about that chart was the insurance difference. They had the vehicle that lasted 15 years still paying 82% of the insurance of the vehicle that was being replaced every five years. My guess is that the older car was being over-insured in the last ten years. I never have anything but liability insurance on my old vehicles. I always make sure to have enough money in my emergency fund so I can pay cash for another older vehicle if the one we’re driving gets totaled or something.

    Our current 1992 Escort has 127K miles on it (we bought it six years ago with 50K on it) and is just hitting the point when a number of maintenance issues have come up recently. However, the body’s still in excellent shape (cars made after about 1990 have considerably longer lifespans than cars used to have, due to advances in rust-proofing) and I expect the car will last at least another few years with only minor maintenance issues. (Until recently, the maintenance expenses had always been fairly trivial, though certainly somewhat greater than for a newer car, and the car is fundamentally still sound.)

    Anyway, if all you care about in a car is having transportation to get you from Point A to Point B at the cheapest possible price, don’t overlook paying cash for an older vehicle (we paid $3500 for the Escort six years ago and it’s some of the best money I’ve ever spent). Just remember to have enough cash left over so that the loss of the vehicle won’t be financially embarrassing to you. The savings in capital costs are usually much greater than what you lose in operating costs.

  16. While I agree with Trent’s example, don’t generalize the specifics. Run the numbers for your car.

    Generally, the used vehicle “free” market works.

    So, it cost almost as much to buy a 2 year old Civic as it does to buy a new one. That’s a good indication of what the market thinks the quality and utility of Civics is. The market sees that the 2 year old Durango just isn’t desirable so it drops fast.

    (As a former grease monkey, I think this is 2/3 quality, but maybe 1/3 psychology – for those in the market for SUVs, it just isn’t fashionable to be seen in an old one.)

    Aside from the transaction costs, you could buy a new Honda every few years and almost come out even!

  17. (Of course, the “almost” is theoretical. You’d have to sell the car yourself… if you trade it in, you’ll get black book value. See daub815′s like for the actual costs.)

  18. Cheaper to buy even a new engine and transmission than to buy another late-model vehicle.

    If they’re highway miles, I wouldn’t worry too much about 55K in 3 years.

  19. For those saying that 55k miles is “nothing” or low, consider that is on a 2005 model, which is about 18k miles per year. The “typical” annual mileage is 12k.

    And remember depreciation works like this: you lose money. Shocking, I know. The average car payment in America is $484/mo over 84 months according to the Auto Dealer’s Association. So not only are people paying almost $500 a month, per Trent’s math, they’re losing $500 a month in depreciation.

    Think about that. In one year, that adds up to $12,000. You can get a really nice used car from 2000-2002 for $12,000. Half that will buy a very decent used car. I just paid $3000 for a car[1] that my mechanic expects will last another 2 years without major mechanical work, and many many more years with a few typical high mileage repairs (pumps, gaskets, etc etc).

    [1] 1994 Toyota Camry XLE V6. Its in fantastic shape. There’s dozens of cars like this available in most major cities, with a little digging and hunting.

  20. I agree with everything here..I have a question ..My company pays my car note Audi Quattro wagon ($440/mo) the car has 85k miles..it is reliable excluding the tranny replacement at 60k..my question is the trade is at $14k..I am under water….current loan at $20k..what should I consider?..I am in sales and need a car but cannot afford to pay down the excess..not right now..

  21. The whole thought of paying as much for a used Civic as new MSRP is insane. If you are looking for a great value, then a used domestic car is a smarter choice. The resale value means zip if you drive a car into the ground.

  22. Brad, a used Honda sells for more than a used car of most other brands because it has a longer expected lifetime and/or lower repair costs due to it being more reliable. People are paying more because it is a better car. The fact that it has a higher resale value is a byproduct of this fact.

    As for the reader who asked about trading in the SUV, the husband is right about one thing: the longer they drive an SUV, the worse off we all are. Not only do SUVs waste a lot more gas than the average car, but they are less safe as well. Here’s a great article by Malcolm Gladwell that appeared in the New Yorker about the safety of SUVs: http://gladwell.com/2004/2004_01_12_a_suv.html

  23. I agree with this post, but as a non-mechanic I like to buy a new car. I take very well car of my cars to maximize their longevity. I worry that if I were to buy a used car, it’d be one that wasn’t maintained well and I’d be the one paying for the deferred maintenance. I’ve only bought 4 cars (1 used) in my 43 years and I still own two of them.

  24. I think there are other factors that are not adequately discussed in this article. What about the cost of vehicles today, versus waiting 1 year, 2 years, or 3 years. Your depreciation may be less, but how will the overall value compare to the potential new car’s value. And where does the fuel economy, insurance factors, etc., come into play?

    And we must remember that extenuating circumstances that may not have a dollar value (need for more room/space, or less room/space, etc.)

  25. I have a 2000 Honda Accord with 130K miles. The car runs great, the first brake job was at 105K front/rear’s. Timing belt replaced at 105K. Other than a battery, tires, and oil changes, I haven’t spent a dime on other repair’s. I expect to do another timing belt at 200k, at that time I will do the water pump, maybe the clutch and keep on trucking for another 100k. The car gets exceptionally good gas mileage around 35 on the highway at 70 MPH in cruise. I don’t have any plans on getting rid of this car. I know what maintenance has to be performed and based upon what I’ve seen in new car’s, mine is significantly less.

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