Trade paid-off car for a newer used car?

Tara Baukus MelloDear Driving for Dollars,
I recently paid off my car that is 4 years old and has 86,000 miles. I like it, and it's running fine, but I'd like something that is still under warranty and has fewer miles. My commute for work is 80 miles round trip, and I take road trips.

I was planning to buy a 3-year-old used car with about 23,000 miles, which will require me to get a loan for about $9,000. I have good credit, so my interest rate is good. I'm wondering, though, am I doing the right thing?
-- Viki

Dear Viki,
You log a lot more miles than the average American driver -- more than 20,000 per year by my calculation, so I can understand your anxiousness to get a used car with fewer miles. But I don't think your idea is the best, financially.

You are considering buying a used car that already has two years of driving miles on it and is likely to be out of warranty in less than a year with your driving habits, assuming it's a car with a 36,000-mile warranty. So you're not really buying that much, and you're getting yourself back into another car loan.

Keep in mind that today's cars are built to last into the hundreds of thousands of miles and that the majority of Americans today are driving cars that are 10 years old. Your current car suits you and should last you for another five years at least, assuming you stay on top of the regularly scheduled maintenance. You can find the manufacturer's recommendations in your owner's manual.

Rather than trading in your current car, I'd suggest you put aside 25 percent of the monthly payment on the car loan that you just paid off to start a repair and maintenance fund. That way, when it is time to bring your car into the shop, you'll already have the funds available to pay the bill. If you can, take the remaining 75 percent of the monthly payment you had been making and put it in longer-term savings, so when you really need to buy a new car, you'll have a substantial down payment. Perhaps you'll even have enough to buy a new car with cash.

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