Does it make economic sense to buy a car every two to three years — particularly as an old car will cost more with repairs? Or hang on a bit longer?

Of course every person's financial situation differs, but before you decide to buy a new car and dump the old one, here are some points to mull over.

Cars experience the biggest drop in their value during the first year. This is most pronounced with luxury cars, as many people at this end of the market only keep their cars a short period of time. The car's value will continue to drop over time, especially once it reaches an age where it is less likely to qualify for financing — so a prospective buyer will have to pay cash.

The car's condition also influences its resale value, such as the mileage and whether it has any bumps or scrapes. Buyers also respond to aesthetics: does the car look nice? If you sell your car while it has a high resale value, you can use it as a large deposit towards your next car, thus reducing the amount you have to borrow.

Maintenance vs finance charges

Older cars do require more maintenance. If you've bought a good brand which is known for its reliability, this need not be a problem. If you look at the amount of money you would need to set aside for maintenance every month (so that you aren't caught short when your car needs work), it's unlikely to equal the amount you'd pay for a new car, even at the low end. Remember, that on a higher-value car, you would probably also pay more in insurance.

While cars don't keep on going forever — though some seem bent on proving us wrong — a three-year-old car can hardly be viewed as "old". If you replace a new car every two or three years, you'll pay a fortune in finance charges. It's much better to keep your car for five years or more, and pay it off as soon as possible.

That way, if you've paid your car off in three years, you can save a substantial amount over the next two years, and possibly even pay cash for the next one. That puts you in a better financial position immediately, because you've cut out a significant amount of debt and freed up income that you can use for investments.

Most of us are in debt of some form or another. But in order to be in a healthy financial position, we should be striving to cut out as much debt as we can. Reducing car finance charges goes a long way towards easing the burden.