In September 2009 I bought my first ever brand-new car (a Peugeot 107) under the government's scrappage scheme. I put down a £4000 deposit (lent by family) and finished paying it off in Sep 2012. When I took the car to be serviced yesterday, I was approached by the salesman who sold me the car originally asking if I wanted a valuation on my car and a quote on a new car, which I accepted.

The salesman has suggested that as my car is now out of warranty, it would make sense for me to part exchange it for a new car. He valued my car at £3,500.
He suggests that I put down a £2,500 deposit on a Peugeot 208, pay £212 a month for 36 months, leaving me a total outstanding of £5,350 which I could then either pay off, or start again with a new car (but with no deposit to put down). The £212 includes insurance and servicing for 3 years - 'Just add fuel'.

I don't know what to do! I am currently a post-grad student and hope to begin a PhD in Sep 2014. Finding £200 a month is possible, but I like the fact that I now own my car and am put off by the idea of 'leasing' a car forever, particularly when it will be a while before I have a good salaried job.

My current car is fine - it's slightly noisy on the motorway and is fairly standard with few modcons - but runs well. The Peugeot 208 is infinitely more luxurious (by my standards) and seems safer with airbags throughout etc. I am tempted to take them up as my current car is at least worth something at the moment and won't be forever. But I also don't want to waste money unnecessarily.

Should I just keep my current car until 'the wheels fall off' and then worry about a new car then?

Or, should I take up Peugeot's 'Just add fuel' offer as they describe it?
Or, should I go for the 'Just add fuel', but pay more each month (and put down a larger deposit) so that after 36 months, I own the car outright (as I did when I bought the 107)?

Apologies for the very long question - I don't know anyone else who can answer this question honestly and concisely!