Using Your Equity

When Do I Replace My Car and How Should I Pay for It

Woman on the phone in her home deciding when to replace her car and how to pay for it

For many people, a car is a necessity. You need your car to commute to work, shop for groceries, get the kids to after-school events and to take family vacations. You may enjoy having a nice car, being able to show off to your friends and family. You spend significant time in your car, relying on its dependability and learning its quirks. It almost becomes a friend.

But at some point you will have to replace your car. The timing is likely to be based on financial, emotional and circumstantial considerations (like an expanding family).

What are your key considerations for car replacement?

Start with rational financial assessment.

  • The bottom line perspective is pretty straightforward. You should consider selling your car before you start paying more in average monthly maintenance and repair amounts than you would pay for owning and maintaining a new car.
  • Estimate a cost per mile breakpoint. Initially this ratio will be high to include a loan or depreciation. It declines as you pay off your loan, but rises again as you start to have mileage-based scheduled maintenance and post-warranty repair and replacement costs. You don’t have to guess at future expenses. Often a trusted mechanic and online research can help you predict the timing and costs for expected repairs.
  • When any specific repair issue arises, if the repaired car would be worth less than what you’d have to pay for the repair, look for a new car. This is a common occurrence after a major accident. Or, if you expect this issue to arise periodically, it may be worth shopping around to explore your options.

Sometimes emotions come into play.

  • You may want to upgrade for newer safety or environmental features. For example, you may need a newer car with side airbags if you have a baby who’ll be in a rear car seat. You may want a backup camera for an inexperienced teen driver. If you want to reduce your carbon footprint, you might want to shift to a hybrid or electric car.
  • If you just can’t afford to be late to work again because your car won’t start or if you feel uncomfortable getting into the car despite the assurance of your mechanic, start shopping for something that increases your sense of reliability or safety.
  • You may want or need a newer, better-looking car for personal or client comfort. For example, real estate agents regularly drive clients around on house-hunting visits. The appearance and comfort of their cars can actually have an impact on their success in attracting clients. Zillow surveyed real estate agents and found that they replaced their cars every three to six years.

How to get the best financial performance from your car

Use these tips to make sure you’re getting the most value from the car you have now or the one you’re going to buy.

  • Buy your car used rather than new. A car loses 15 to 25 percent of its value each year. Assuming 20% depreciation, if you buy a car for $20,000, it might be worth only $16,000 after 2 years. You would lose $4,000. On the other hand, if you buy a used car for $10,000, you would lose only $2,000 by the second year. This difference in depreciation continues to accumulate through the years.
Year of Ownership New Car Value Old Car Value
1 $20,000 $10,000
2 $16,000 $8,000
3 $12,800 $6,400
4 $10,240 $5,120
5 $8,192 $4,096
Depreciation loss in first five years of ownership $11,808 $5,904


  • Think about operating costs, not just upfront price when you make a purchase. If you buy a car that takes only high-octane fuel and has a low mpg rating, you’ll be paying a lot more per month than you will for a fuel-efficient car. This becomes especially important with high gas prices.
  • Don’t ignore the maintenance schedule or any panel alarms on your car. Spending $30 on an oil change is much better than spending thousands to replace the whole engine.
  • Clean your car regularly inside and out and make small repairs and replacements, such as changing light bulbs and repairing small stone chips in the paint. Remove road salt to prevent rust.
  • Drive safely and defensively. According to CCC Information Services, 19.5 percent of collision and liability losses in 2016 resulted in total loss of car value. Even minor fender benders can dramatically reduce the value of your car. Check the Kelley Blue Book value for your current car to see the difference in resale value for excellent, good and fair condition.

How Do You Pay for Your New Car?

Once they make the decision to buy a new car, many people just want to get rid of their old car as quickly as possible and ride out of the dealership in a new car that same day. But it may be beneficial to be patient.

  • You might be leaving money on the table if you take the dealer’s first offer for a trade-in amount. Kelley Blue Book provides a “What’s My Car Worth?” estimate for dealer trade or private-party sale, often differing by thousands of dollars.
  • Paying cash is an option. However, if you are able to keep your money in investments that offer higher interest than your best loan option, consider taking the loan.
  • You’re likely to be offered to sign up for dealer financing. A car loan often uses the car as collateral, so the rate will likely be lower than a non-securitized personal loan. However, it is important to check all the terms as well as the reliability of the loan provider.
  • You may get a personal loan from a bank, which will likely have interest rates lower than what you’ll have on a large credit card balance.
  • Paying for some of the car price with a credit card is fine if you want the reward points and can pay off the whole amount immediately. However, dealers generally won’t allow you to charge the full price since they make money on financing.
  • Many people don’t realize that a home equity loan can be used to finance a car. Because this is a secured loan using the collateral in your home, the interest rate is likely to be lower than a personal loan or even dealer financing.

When you’ve decided that it is time to replace your car, even though you’re ready to fall in love with your new car, spend some time going through your payment options rationally. You may find a way to save money…and love your new car even more.

Did you know?

The home equity you’ve earned
can be used in a multitude of


Start your application online

or give us a call.

  • Weekdays 8am–Midnight ET
  • Weekends 10am–6pm ET

Start your application online or give us a call.

  • Weekdays 8am–Midnight ET
  • Weekends 10am–6pm ET