Keeping vehicles for the long haul can boost savings

Recently, my Washington Post colleague Warren Brown, who has a car review column called “On Wheels,” received the following question during an online chat:

“Does it ever make sense to go ‘upside down’ on a loan to buy a new car? I have a 1998 Plymouth Voyager minivan that I bought used last year. It’s getting up there in mileage, and I seem to be putting more and more money into maintenance. I figure I can get about $7,000 for it in a trade. I owe about $9,000. The question is whether the extra $2,000 added to a new loan will matter much in terms of monthly payments.”

Being “upside-down” means your loan is more than the value of the car. In this case, Warren referred the questioner to me.

I feel like fussin’.

Let’s say this person buys a new 2002 Chrysler minivan (until 2001, the Voyager carried the Plymouth badge. When the make was discontinued, Chrysler adopted the name for its least-expensive minivan). According to a price quote I found on www.edmunds.com, the new minivan would go for about $20,000, not including tags and taxes and optional upgrades.

I then went to www.bankrate.com to find out the average interest rate on a 60-month car loan. At the end of September, that rate was 6.49 percent (if your credit is good). I used the auto loan calculator on the Web site to determine the monthly car payment on the Chrysler Voyager (with no down payment). It would be $391.23 a month.

But add on the extra $2,000 still owed for the 1998 minivan and the monthly payment jumps to $430.35. That’s a difference of $39.12.

Maybe you’re thinking that’s not a lot of money, and the person would have a brand new car with less spent on maintenance.

However, what about the cost of losing the ability to put that $39 to work to earn more money?

Using the simple savings calculator on the Bankrate.com site, I found that regularly saving $39 a month at just 2 percent interest (compounded monthly) over 60 months would come to $2,458.85.

In my bankbook that’s not an insignificant amount of money. Buy a more expensive car and you’re talking more money lost.

A lot of people find themselves upside-down in their car loans. And auto lenders are more then happy to let people stack debt from their trade-ins onto their new vehicle loans. But avoid this type of transaction if you can.

Suppose the person with the minivan has spent about $1,500 in the last year on repairs. I understand his thinking: For that kind of money, why not buy a new car? But follow the money.

On a monthly basis the repair bills come to $125.

Still, it is cheaper to keep the car then to trade it in for a new one.

Wait, you say.

That’s $125 a month on top of the current car loan.

Assuming the minivan owner had paid $11,000 for his current vehicle (again, no down payment), at a 7 percent interest rate for 60 months, his loan payment would be $217.81.

Even adding the repair bills, he still comes out ahead at $342.81. Remember, his new loan would cost $430.35 a month.

It’s tempting to look at your budget and figure you can handle the expected loan payments for a new car under warranty, rather than be hit with unexpected repair costs.

“Deciding when to trade in an old car for a newer one is a matter of personal preference such as how much inconvenience and unreliability can you stand in your vehicle,” said Bob Kurilko, vice president of Edmunds.com. “But crunching the numbers will almost always indicate you should hold onto the older car.”

In fact, CNW Marketing Research, a Bandon, Ore.-based firm that tracks the auto industry, found that the useful life of a vehicle meaning the mileage before major mechanical problems tend to occur has climbed from 9.8 years and 120,000 miles in 1985 to more than 14 years and 185,000 miles in 2001.

Even if your car doesn’t last 14 years, you certainly have a good shot at keeping it well past the loan payoff and thus put more money in your bank account if you maintain it properly.