Car Checklist: Repair Or Replace?

Americans are keeping their cars longer than ever before. The median age for passenger cars hit a record high of 9.4 years at the end of 2008. Drivers are loathe to take on more debt right now, while others are underwater with their car loans.

But eventually, everyone who drives an aging car will be faced with a major repair. At that point, you have to decide: repair, or replace?

Before deciding, Early Show financial adviser Ray Martin suggested running through a checklist on Thursday's The Early Show:

Safety: Older cars built before the early 1990's lack important safety features like airbags and antilock breaks. While you can repair an older car, it's usually not practical to retrofit it with new safety features. You might reconsider your plan to hand down the old car without safety features to your teen driver as teen drivers have the greatest incidence of accidents and fatalities.

Reliability: If your car is susceptible to chronic problems and you rely on it for regular transportation, it may be best to cut your losses and get rid of it. Better to fork over the money for a newer more reliable car than to lose your job for being continuously late.

Estimate of Repair Costs: Ask for an estimate from a qualified auto mechanic before you agree to any repairs. Look for a mechanic certified by the National Institute of Automotive Service Excellence (or Automotive Service Excellence certified).

Value and Useful Life: It's important to get an assessment of both the value of the car and the expected useful life once it's repaired. In other words, once you cough up the cash for the repair, how much longer will you be able to drive the car? Ray says if you pay $1,000 (or less) and are then able to keep the car for another year (or pay $2,000 and drive for 2 years, etc) then the repair is worthwhile. Average $1,000 out over 12 months and the repair will cost you about $83 a month - that's much cheaper than a car payment! If the repair costs will significantly outstrip the value of the car or will not extend its useful life, then the repair may not be worth it.

If, after going through the above checklist, you decide it's time for a new vehicle you're faced with another choice: buy new, or used?

In the past, Martin always advocated buying a newer used car. By doing so you avoid the depreciation that occurs in a car's first year -- a car typically loses 15 to 20 percent when you drive it off the lot, according to Martin. You'll also avoid a lot of financing costs, he says, associated with a new car.

But for the first time, Martin says it may make sense for some folks to consider buying a new car.

"The Cash for Clunkers bill is a game changer," he said.

The bill offers car owners a credit of $3,500 to $4,500 towards a new car if they turn in an old gas guzzler.

But why exactly is Martin so excited about it?

Because, he said, if you buy a car that costs $22,500 to $30,000, the credit will offset the depreciation that occurs in a new car's first year.

That means, 20 percent of $22,500 is $4,500; 15 percent of $30,000 is $4,500. By taking advantage of Cash for Clunkers, Martin said you can eliminate the major problem of buying a new car.

So, how do you figure out if you should take advantage of the Cash for Clunkers bill?

Another checklist:

Does your car qualify?
Both your old and potential new cars must meet some pretty strict requirements; the biggie is fuel economy. If you drive an old SUV or truck there's an excellent chance that you'll qualify.

Sales values?
Used cars are in high demand these days. If you could get more that $3500-$4500 for your car in a private sale, you're probably better off doing that instead.

New car costs $22,500 to $30,000?
Again, you want the Cash for Clunkers credit to equal 15 to 20 percent of a car's value.

Can you afford car loan?
At the end of the day this may be the most important question of all. Even if Cash for Clunkers is a good fit for you, you'll still need to make a monthly car payment. If you find that you have to use most, or all of your emergency fund, or have to budget too tightly to make the payments, then start looking for a used car instead.