Pamela Kratzenberg had wanted a Jeep for a long time. So when she and her husband, Rich, spotted the white 1994 Grand Cherokee Laredo on the used-car lot at an Earnhardt Ford dealership in Phoenix, they were very interested.
The sport-utility had about 50,000 miles on the odometer and was priced at $17,000. The couple signed a five-year loan agreement at 9.5 percent interest.
That was in 1998. By the first part of 2001, the Kratzenbergs’ Jeep was pushing 90,000 miles. The couple still owed more than $8,000 and had been told their truck needed $3,000 in repairs.
“We had had a lot of trouble with it right from the start,” said Pamela, an elementary school teacher and former Chicagoan. “We really didn’t know what to do when we learned how high the repair bill would be plus the fact that we still owed so much on it.”
Whether an owner owes more than a vehicle is worth or has paid off the loans, it’s tough staring down the barrel of substantial fix-up costs, especially on well-worn vehicles.
Most experts advise reason over emotion. It’s tempting to begin thinking about somehow getting into a new or late-model used vehicle. It likely isn’t prudent.
“Apply some discipline,” said Daron Gifford, automotive practice global director at Deloite Consulting in Detroit. “Lay out a financial statement that includes not only your current monthly payments, but also what you pay monthly for gas, parking, insurance and repairs.”
Do the same thing for what it would cost to buy and maintain another vehicle. Check the resale value of your vehicle.
In some instances, he said, a new vehicle at a better interest rate might be the solution.
It was for the Kratzenbergs, who found a Nissan dealer in Phoenix willing to give them $7,200 on the Jeep in trade for a 2001 Pathfinder. The couple got a 3.5 percent finance rate on their new $20,000-plus SUV.
If the market value of the vehicle is less than your what you owe on it, it might be best to hang onto it and “zero it out,” said Mike Flynn at the University of Michigan Transportation Research Institute.
“There’s no question that when you own a car, at some point it will need major repairs,” Flynn said. The moment of truth arrives when you are hit with the first big repair ill, he said.
“Do I want to put $1,800 toward repairs or $1,800 toward a new vehicle,” he asked rhetorically.
The Magliozzi brothers, Tom and Ray (a.k.a. Click and Clack), often advise callers not to abandon ship when their cars develop mechanical problems.
The National Public Radio hosts recently counseled a distressed owner of an ’86 Honda Civic to ignore the so-called book value and concentrate on the car’s value to him. Take it to a trusted mechanic, get a list of everything that is wrong and the cost to repair and decide whether this is the best transportation you can get for that amount, they said.
Flynn suggested doing research in several areas:
Look at the current wholesale value of the vehicle (there are Web sites, including NADA.org and Autotrader.com, with free information).
Consider the fact that vehicle life tends to be longer than in the past.
“Consumer Reports gives information on frequency of repairs,” he said. “That is one way to assess the quality of cars.”
Then there is the personal fatigue factor. Plenty of folks like to switch vehicles after only a few years. That includes those who don’t much like cars, Flynn said.
Gifford suggested consumers in parts of the Midwest are more car-oriented and crave new models.
J.D. Power & Associates’ Brian Walters said research indicates consumers have a relatively short attention span with their new cars.
“They hang onto them an average 4 1/2 to five years,” Walters said.
This might reflect ennui or the specter of repair bills. Or it could mean that the vehicle is paid off and the owner is ready for a new one–and more payments.
“The majority of our retail loans are for 60 months,” said George Borst, president and chief executive of Toyota Financial Services USA. “We are seeing a comeback in 72-month contracts. Consumers are trying to reduce their payments.”
On a $10,000 loan at 8 percent for 60 months, $106.85 of the first $237.90 monthly payment covers interest, and $131.05 is principal, Borst said. By the 36th payment (at the end of three years of the five-year loan), $80 is interest.
Borst said it depends on how much you put down on a car, but at about the 38th to 42nd month the consumer is in an equity position.
That means you do not still owe more than the car is worth if you want to sell it.
While Toyota Financial does not make loans for repairs, it works with its dealers to try to help consumers trade in vehicles with repair needs for new cars.
“We will finance more than 100 percent of the MSRP,” Borst said. “That’s probably 20 to 25 percent of the time.”
Borst said those loans may reflect repair costs for trades but are just as likely to reflect sales taxes, extended warranties and other items.
Toyota Financial is increasingly active in used-car loans, he said.
“We do an awful lot of business on used products,” he said. “It’s an area where we’ve grown considerably in the last couple of years. We need to make it easy for our dealers to sell their used cars.”
