Let's just get this out of the way: in most cases, buying a brand new car is not the best financial decision. After all, unless you're paying for your car in cash, buying new means paying interest on a depreciating asset, and buyers often end up owing more than the car's actual value before the loan is paid in full. But even for those frugal drivers who've been judiciously maintaining older cars, there comes a tipping point. It could be that your car's trips to the repair shop have been far too frequent, or maybe you've just grown tired of the ever increasing crescendo of squeaks and rattles that characterize aging vehicles. Whatever is leading you to consider buying a new (or much newer) car, we provide some sound financial reasons that could tip the scales in your favor.
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- Interest Rates are Low
The Federal Reserve has held its target interest rate (the federal funds rate) between 0% and 0.25% since December 2008 in an effort to reduce borrowing costs and help the economy recover. This is the rate that determines the prime rate, and consequently bank lending rates. The federal funds rate was as high as 4.75% in 2007, which made the cost of borrowing significantly higher. If you've been thinking about replacing your car in the next couple of years and you plan to finance your purchase with a loan, it may be better to make the move now rather than later. Interest rates are so low they have nowhere to go but up. Canada raised its benchmark rate this month, and many experts believe the U.S. may soon follow suit.
- It Needs a Major Repair
If you have an older but reliable car, it's almost always worth repairing. Although some major repairs can cost upwards of $1,000 on most basic cars, this is a relatively small expense for a car you already own and on which you are not paying interest, especially if your car is still worth considerably more than what you're paying for the repairs. However, there are certain repairs that are considered a death knell for an older car, such as engine or transmission replacement. Depending on the age of your car, major repairs to steering, suspension and brakes could also fall into this category. These types of repairs tend to cost thousands, and if you have a car that's nearing the end of its lifespan, you may be better served putting that money toward a new vehicle. (To read more about how to determine whether you should fix your car or shop for a new one, see Your Car: Fixer-Upper Or Scrap Metal?)
- Gas Mileage
If you have a terrible gas guzzler and you plan to replace it with a very efficient vehicle, this move may pay off - although not right away. So, if you're driving a large SUV with four-wheel drive, you can expect an annual fuel cost of about $3100, according to fueleconomy.gov. If you replace that vehicle with a mid-sized car, your annual fuel cost will be cut in half, landing you in the $1300-$1500 range. If you do a lot of driving, your savings will be even larger. Clearly, even at $1,500 a year it's going to take a number of years before you recoup the cost of a new car, but if your SUV still has a high trade-in value or it's old enough that it's time to consider replacing it anyway, better gas mileage may be the tipping point that makes a new car sensible for you. (For more insight on fuel economy, see 7 Hot Hybrids: Will They Save You Money On Gas?)
- Tax Credits
In recent years, a number of tax credits have been introduced to encourage the purchase of newer, more fuel efficient vehicles. These include a tax credit for hybrid gas-electric and alternative fuel vehicles, and a credit for plug-in vehicles and conversion kits. If you're considering buying a hybrid or electric vehicle, these programs could benefit you. (For more credits that could save you money come tax time, see Tax Credits You Shouldn't Miss.)
- Peace of Mind
If your old faithful has recently developed a tendency to leave you stranded on the side of the road, the peace of mind of having the reliability of a new car may really appeal to you. After all, even the most unreliable car models tends to do well in their first three to five years – plus, most cars have at least a three-year or 36,000 mile warranty coverage that will cover most major repairs. So, although you'll likely be making payments on your new car, at least you'll be driving it rather than standing beside it waiting for a ride.
Catch up on the latest financial news, read Water Cooler Finance: Shocking Court Rulings, Sinking Markets.