Should I Buy a New Car Now? Or Keep Clunker?

With incentives on new cars at all-time highs and dealers desperate to move inventory, it is an excellent time to buy a new car. But what if you could eke out another 50,000 miles on your old car and save a lot of cash? James, a reader from Easton, Md., recently wrote to us with just such a conundrum. He was considering trading in his 2003 Chevrolet Silverado pickup, which had 94,000 miles on the odometer, for a new, loaded Dodge Ram, even though the Chevy was paid off and in good condition. He acknowledged that he didn't really need a new truck but worried that the deals wouldn't be nearly as attractive if he waited.

Dollars and Sense.

How do the financials stack up? We asked Vincentric, an automotive-research firm, to compare the cost of several new vehicles with their five-year-old counterparts. We assumed that the used vehicles were paid off and the new vehicles were paid for with a five-year, 6.6% loan and 15% down. Based on total ownership costs over five years -- including insurance, fuel, repairs and depreciation -- the results are firmly in favor of hanging on to your old car.

For example, a new Chevrolet Malibu will cost $33,064 over five years, or $7,343 more than the $25,721 it would cost you to maintain a 2004 model that's paid off. Likewise, a new Honda CR-V has a five-year ownership cost of $33,520, versus $24,597 for the five-year-old model. That's a savings of $8,923 if you keep the old vehicle.

James was tempted by Dodge's employee-pricing promotion, plus $3,000 in rebates and a $1,000 dealer coupon, all together knocking $11,000 off the sticker price. A generous trade-in value on the Silverado and 0% financing over four years (plus assurances that the feds would back the warranty) clinched the deal, and he's now the pleased owner of a new Dodge Ram pickup. But Vincentric's numbers arenÕt encouraging.

The biggest new-vehicle expense is depreciation (in James's case, the Dodge Ram will lose $25,000 in value over five years). Maintenance and repairs are the biggest hits for older vehicles: Repair costs are typically twice as much, and maintenance can cost as much as three times more for five-year-old models.

+ "Cash for Clunkers' Incentives Program to Buy New Car
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+ Cash For Clunker Incentives Plan to Vote Today by Senate
+ Canadian makers,dealers ask for $3,500 incentives to scrap old clunkers
+ 'Cash for Clunkers' Incentives to Revive US Auto Sales

Factor It All In.

Spooked by worries over the economy and unemployment, more people are taking the value route -- keeping their cars longer and paying for repairs. The average length of vehicle ownership increased to four and a half years in 2008, up from four years in 2002, reports R.L. Polk, an automotive-information firm. And according to Sageworks, a private-company data provider, auto-repair shops' sales rose 2% in 2008.

What's more, a car-loan payment is a set amount, whereas holding on to your old car "provides an element of flexibility," says Philip Reed, of Edmunds.com. "Fixing up your clunker is a variable cost per month, and some repairs will be elective." The maintenance section of Edmunds.com has estimates for all service visits, so you can get an idea of typical expenses. One deal-breaker for your old car, says Reed, is a failed transmission -- which can cost up to $3,000 to rebuild or replace. Other tipping points: The vehicle has been unreliable from the get-go or it looks as if you'll be making multiple repairs every month.

Uncle Sam's incentives might also help persuade you to junk the clunker. You can write off state and local sales taxes and excise taxes on new cars, light trucks, motor homes and motorcycles bought from February 17 through the end of 2009. You claim the deduction on your 2009 tax return regardless of whether you itemize or claim the standard deduction. And as we went to press, Congress was weighing the latest version of the "cash for clunkers" bill, which would give vouchers worth up to $4,500 to buyers who trade in their old cars for new, more fuel-efficient vehicles.