Finance a vehicle or keep the current one?
Financing changes the total cost, and keeping also has costs that deserve to be counted.
Changing vehicles with a loan is a big decision. Before deciding, it is worth comparing the total cost of the two options: financing a new (or newer) car and keeping the current one. This text is general information, with no financial advice, and individual situations vary.
Total cost
Financing involves a down payment, installments, interest, fees, insurance, taxes and depreciation of the new car. The total cost is higher than the list price, because interest adds up. Compare the total amount paid at the end of the contract with the cash price.
Keeping the current one involves maintenance, possible larger repairs, fuel consumption, insurance and the depreciation that still exists, although usually smaller on older cars. The installment disappears, and that amount can be set aside for maintenance.
Interest
Interest can represent a significant part of the cost. Compare the total effective cost or the equivalent indicator in your country, not only the monthly rate. Small differences in rate and term change the total a lot.
Use
Think about how you use the car: how much you drive, in what conditions and how much reliability you need. A car driven little may not justify the change; one that breaks down often and is essential for work may.
Illustrative example
Imagine the current car requires $4,000 a year in maintenance, and the new one would cost $1,800 a month in installments, plus higher insurance and taxes. Even with the new car's lower maintenance, the total annual cost of financing may be several times larger. In another case, an old car with frequent repairs may cost more than expected. The numbers are fictional.
How to compare
- Calculate the total annual cost of the current car.
- Calculate the total cost of the loan over the whole term.
- Include the sale of the current car as a down payment, if applicable.
- Consider the impact of the installment on the monthly budget.
- Test scenarios: what if interest rises? What if income falls?
When it makes sense
Changing may make sense when the current car generates high, frequent costs, when safety or reliability are compromised, or when changing needs require another vehicle. Keeping may make sense when the car is in good condition and the budget is tight. See the practical car maintenance and buying checklist on this site.
