If economics matter, make sure to do the math before trading your old ride.
It is not unusual to have a customer in my shop who must ponder whether it is time to replace their current car or invest a significant amount of money into keeping it reliable. Sometimes it is a brand new customer who never had a thorough evaluation of their vehicle. Sometimes it is a customer who has just put off repair after repair until the list of repairs is so large that it dwarfs the value of the car or sometimes it is someone who typically keeps up with their vehicle and has just encountered an unfortunate, major break down.
Often, the right call is to fix the car, but sometimes the right call is to just junk it. Because our customers trust us, they will look for our shop’s guidance of what makes sense. We have a strict policy of not telling them what to do, but, instead, we provide them with all the information they need to make a sound decision. I typically tell them they can’t pick wrong if they take the time to look at the facts provided because they are simply picking what works best for them.
The most typical statement a customer may make after receiving a large estimate is “Pete, the car isn’t worth putting $4,000.00 into because it is only worth $3,000.00.” This is a popular statement that many garages across the country and world probably hear. In fact, many garages perpetuate this MYTH by offering this same sentiment as their opinion. I say it is a myth because it simply isn’t logical to use the value you can sell your car for versus what it costs to fix, unless you are in the business of buying and selling used cars. In that case, like any other business, you need to buy low and sell high. The two monetary issues have little to do with each other. This is probably why it is so hard to find a great used car on a used car lot. Repairs do not increase the value of a car and increasing a car’s value is generally a poor reason to fix a vehicle.
So let’s look at the financial aspect of an automobile. It is inaccurate to call most automobiles a fiscal investment. You have to buy it initially (which costs money), then you need to insure it (which costs more money), then most cars require some sort of fuel to be installed in them (which costs even more money) and lastly they need repairs to stay reliable on the road, which also costs MONEY! In fact, many automobiles will cost more per year to insure and put fuel in than they cost to repair. None of which are good for a long term cash investment. Plus, as you own the car, it is dropping in value as it ages. None of this adds up to an investment because buying a car is not an investment, but, instead, is a cost of having the lifestyle most of us choose to have.
If your customers are looking at the vehicle’s selling value to determine whether it is worth fixing, they are looking at the wrong statistics. So, if not cash, what is a vehicles owner’s Return Of Investment (ROI) or value for owning a vehicle? Simple, it is miles driven. Think about how powerful this is. Don’t we typically own a car so that it can take us places? Why would we ever care what a car’s selling value is once we own it? Shouldn’t we care about how reliable the car is, whether it suit our lifestyle needs and what its overall cost of ownership is? Your average car owner can usually wrap their head around this concept if you show them how to properly calculate their ROI.
There are 4 primary areas of costs associated with owning a car:
- Cost of Purchase. This is simply what you paid to own the car. This number varies greatly because some folks buy brand new, expensive and some folks buy used, cheap.
- Pretty self explanatory and also varies. Depending on your car’s fuel type and how much you drive, your fuel costs could be high or low.
- Most states and municipalities mandate insurance coverage and its costs vary greatly depending on driving record, vehicle type and location.
- This is probably the most despised area of vehicle ownership, but it is a fact of life. Cars break and it can get pretty expensive to fix them.
Economically fiscal folks need to be averaging their costs of ownership out per mile. Personally, I think per mile is sometimes hard to equate for some folks so I
use annual, averaged costs. I think annual costs are easier to understand and gives a better big picture look at what the vehicle in question costs yearly to keep on the road.
I start out showing the vehicle owner what a 6 year car payment on a brand new car of similar type would be. For easy math let’s call it $400.00/ month, or $4,800.00/ year, which is what a $30,000 car would cost if you had a pretty low interest rate.
Then we look at their current vehicle’s repair history. Let’s say we are dealing with a 10 year old car that they have owned for 4 years and paid off because they paid cash for it 4 years ago. Generally, we want to look at the past 3-5 years and figure out what all the repairs and maintenance have cost in that time. Longer durations are better because the calculations typically are more accurate the longer they own the car: Brakes, radiator, water pump, tires, timing belt and don’t forget that lone wheel and tire from when you whacked that pothole after that big storm. So let’s say in 4 years this car has racked up $5,700.00 in repairs. If you divide that by 4 (the years owned), you get $1,425.00/ year average repair cost. At an average of 12,000 miles a year, they would have gone 48,000 miles in 4 years. For those that prefer to calculate by the mile that is about 11 cents a mile. Looking forward, they should expect this car to average somewhere near this number annually. Some years less, some years more, but their annual cost of ownership over any 4 year span is going to be 9-13 cents per mile or between $1,080-1,560.00.
Contrarily, the new car would cost $19,200 in the next four years just in payments. Roughly 40 cents per mile just for payments! Remember, on top of those payments will be some maintenance costs, maybe some minor repairs, but that will only drive your cost per mile up. Plus, as the new car ages they will have all the other advanced repairs the current ten year old car is dealing with. The good news is that once the vehicle owner is done paying the car off, per mile costs will drop significantly. Of course that is only 6 years away if they buy today.
Under the best of circumstances the new car is going to cost $13-14,000 more to own over the next 4 years, plus it still won’t be paid off for 2 more years. In this example, the vehicle owner would be roughly $23,000 ahead if they keep their old car for 6 years. For some folks, this isn’t much money and having that new car smell for a few months makes it worth the extra cash, but for others once they realize the financial impact to their bottom line they may be more inclined to keep their old car running a few more years and keep their money in the bank or spend it on something more rewarding.
This formula invalidates any argument that the old car isn’t worth investing in based on the car’s retail value. The old car is paid for so hands down it is the cheapest option going forward if it is fixable. So the questions that need to be asked before fixing it are:
- Is the old even car fixable? Meaning is the structure of the car so bad that a good pothole may cause the car to break in half? Those of us in the Northeast know what this is like. A professional auto shop has an ethical responsibility to report this accurately. After all, we have to share the roads with this car! In my shop we council a handful of vehicle owners per year that it is time to put their automobile in the junkyard due to rust damage.
- Does it suit their lifestyle? That Corvette they bought when they were 21 doesn’t seat their expanding family so it may no longer make sense to own. Maybe a 4 door sedan or mini-van is a better fit now?
- Lastly, do they like their current car? Quite simply, if they do not like their car they should go car shopping ASAP, so long as they can afford to. Cars cost too much to keep on the road and life is too short to have a car you don’t enjoy. The most valid reason to replace a car is that they want something else.
If the answers to the above questions indicate that the current car they have is suitable and can be made safe, all you need to do as the service writer is show them how the economics make sense. From there the decision to fix is less about what makes the most sense and more about what the vehicle owner wants.
Sometimes the vehicle owner is not well off financially or hasn’t budgeted well for a vehicle break down. They may be just scraping by week to week. Anyone scrapping by week to week is obviously not capable of making decisions based on sound logic and it may be a waste of time to show them how to calculate Cost Of Ownership. This type of person reasons that a 6 year addition of a monthly payment is cheaper than the expensive repair they are facing. The math proves this isn’t accurate, but people will lie to themselves and convince themselves that if they can do it for 4-5 months they will be OK. The trouble comes when the car they bought is 4-5 years old and has a major break down and they need to come up with money to fix it.
In the end, remember, it isn’t the shop’s choice to make. We just need to supply the information so that the vehicle owner can choose what is best for them. Don’t worry if they choose to buy a new car. It is important for the used car market that someone takes the plunge and buys new plus every new car bought today is a used car we will work on tomorrow. It is like having money in the bank from our standpoint.
I will generally advise my customers not to make significant investments if they feel like they are at the end of their ownership. From a fiscal stand point, they are typically better off selling a broken car than paying to fix a car and then sell it. Remember: car repairs do not equate to retail value.
Another concern that is often raised is “can my old car be reliable”. I have seen no data that empirically proves that a brand new car is significantly less likely to break down than a 10 or 15 year old car. In fact most auto manufacturers have a public track record of having over 100 problems per 100 cars they produce. Plus, if you pay attention to the model year of most of the cars inside of a manufacturer’s dealership repair facility, you will find most cars are younger than 5 years old. Being a new car does negate additional repair costs due to the warranty; however, the cost of those break downs was factored in to the original selling cost of the car. Breakdowns are prepaid at time of purchase and covered for a set period of time. This is a subject probably best left for another article though.
Until then, educate your customers on the value of fixing their older car. More importantly, don’t perpetuate the myth that a car isn’t worth fixing based on its retail value.
Special thanks to Mark Hambaum of Richville, Michigan for inspiring thoughts on this subject.