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Rushing Into a Smaller Car Too Soon May Not Save Money

Overall vehicle costs can offset any savings at the pump

May 23, 2008

• Gas Prices Slide 8 Percent from Record • Gas Prices Creep Down • Oil Price Trend May Be Good News For Consumers • Gasoline Drops Below $3.90 a Gallon • Gas Prices Pull Back Slowly • Oil Prices Fall As Storm Misses Rigs • Latest Gas Price Round-Up • 'Run Your Car On Water' Scheme Could Leave Consumers All Wet • Unregulated Energy Trading Blamed for Much of Gas Price Gusher • Airlines Join Effort To Limit Oil Speculators • Questions Raised about MyGallons.com • 'Hypermiling' Is Dangerous, Says AAA • Struggling Drivers Blame Washington for High Gas Prices • What’s Really Fueling Those Sky-High Oil Prices • Credit Card Fees at the Pump are a 'Hidden Tax' on Consumers • Survey: 3 Out of 4 Angry About High Gas Prices • $2 A Gallon Gas Possible, Analysts Tell Congress • Speculators Buy More Oil Contracts Than Oil Companies • Saudis to Pump More Oil • Limiting Oil Speculators Gains Ground • Congress To Probe Oil Price Spike • Oil Market 'Saturated,' Iran Claims • Feds See No Relief from High Gas Prices • High Gas Prices Could Mean Lower Insurance Rates • High Gas Prices Good For Kia, Honda • Gas Prices Rip Past $4 and Keep Climbing • Administration, OPEC See Different Causes Of Oil Surge • Feds Probing Possible Oil Market Manipulation • Beware of Fuel Sippers Sipping High-Test • Retailers Respond to High Gas Prices with Discounts, Promotions • Rushing Into a Smaller Car Too Soon May Not Save Money • Hybrid Sales and Prices Climb in Lockstep with Gas Prices • Truckers Bemoan Burden of High Diesel Costs • Gas Prices Biting into Worker Productivity • Consumers Warned About Gas-Saving Schemes • Is Tony Soprano Controlling Gas Prices? • Oil & Gas: The New Bubble • Critics: New Federal Gas Mileage Standard Falls Short • Consumers Feeling Pain of Skyrocketing Gas Prices • New Gas Price Record Forecasts Expensive Summer Driving Season --- • More ...

With national average fuel prices approaching $4 a gallon, many consumers are clamoring to trade in their current vehicles for smaller, more fuel-efficient ones.

But a new study from Consumer Reports warns drivers that downsizing too soon can cost them more in other owner costs than they'll save at the pump.

CR has always encouraged drivers to buy more fuel-efficient vehicles. But if the timing isn't right, it can cost you more in the long run.

An analysis of the magazine’s exclusive owner-cost data found that it often doesn't pay to downsize if you've only owned your vehicle for three years or less and haven't paid off the loan, even if the new car's fuel economy is much better.

Consumer Reports' experts say consumers should typically hold on to their cars at least four or five years to minimize the financial impact of depreciation and finance charges. Owner cost data include depreciation, fuel usage, interest on financing, insurance, maintenance and repair, and sales tax.

According to CR’s calculations, depreciation makes up about 48 percent of an average owner's total vehicle costs in the first five years of ownership. Fuel, however, averages only about 21 percent of total costs. Because the greatest depreciation occurs in the first three years, your car costs you less to own overall in the following years.

So for a typical, payment-making owner with a 60-month loan, trading in a three-year-old vehicle means you've just taken the biggest depreciation hit on your current car and still have a lot of the loan principle yet to pay off. What you'll save in depreciation costs by holding onto the vehicle for another year or two will net you more money in the long run than you'd save in gasoline with the new car.

"These hidden costs may be the factors you are least likely to focus on when downsizing," said Rik Paul, automotive editor, Consumer Reports. "After all, depreciation and interest are less tangible costs than the high price for a gallon of gas that slaps drivers in the face with each fill up."

For example, a 2005 Ford Five Hundred SEL V6 sedan got 21 mpg overall in Consumer Reports' testing. The 2008 Toyota Prius got 44. Assuming 12,000 miles per year at the current national average for gasoline of $3.75 per gallon, the Ford will cost about $2,000 in gas this year, while the Toyota will cost just $1,000.

But factoring in all of the owner costs of trading in the Five Hundred now, the Toyota will cost about $9,000 to own for the first 12 months, while the Ford costs $6,000. That's a difference of $3,000, or $0.23 per mile.

"Based on today's numbers, it's less expensive to tough out another year or two with a gas guzzler than trade-in too early," Paul said. "However, if gas prices rise past $5 a gallon, large vehicles may see their depreciation accelerate and owners could face new challenges in selling their old model."

CR continues to advise shoppers to buy the highest-rated, most reliable, and safest model with good fuel economy that suits their needs. When it comes time to buy a new model, there are considerable savings and advantages to downsizing, but consumers should understand the full financial impact of the timing for their decision.

Jeff Bartlett, deputy automotive editor, ConsumerReports.org, adds, "While we support the downsizing trend in principle, we caution consumers to look at their long-term owner costs and not rush to make a change they may later regret."

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