By THE EDITORS OF CONSUMER REPORTS
With the national average gasoline price surpassing $4 a gallon, many consumers are trading in larger vehicles for smaller models with better fuel economy. While that’s a good goal, making the switch too soon could cost drivers more than they’ll save at the pump, according to a new Consumer Reports study.
It typically doesn’t pay to downsize if you’ve only owned your vehicle for three years, even if the new car’s fuel economy is much greater. Remember, with a traditional loan, interest makes up a larger percentage of your monthly payment initially, scaling down over time.
Consequently, less is paid on the loan principal in the first year than the last. If you trade in part way through your loan period, you might find you have less equity, or trade-in value, than you expected. And that can limit the potential down payment on a new vehicle.
The other main hurdle affecting your car’s equity is depreciation, or the value a vehicle loses over time. According to CR’s owner-cost estimates, depreciation makes up an average of about 48 percent of an owner’s total vehicle costs in the first five years. Fuel costs average about 21 percent. And the greatest depreciation occurs in the first three years. After that, depreciation begins leveling off.
So, if you trade in a 3-year-old vehicle, you begin the wild depreciation ride all over again with the new vehicle.
CRUNCHING NUMBERS
CR analyzed scenarios based on different types of vehicles, including sedans, SUVs and pickup trucks. For each type, CR chose a typical large model and progressively smaller, more economical alternatives.
The financial models are based on CR’s owner-cost data, which includes: depreciation, fuel costs, interest on financing; maintenance and repair, insurance costs and sales tax.
CR evaluated downsizing from the 2005 Ford Five Hundred (now called Taurus), which got 21 mpg overall in CR’s tests, to a 2008 Toyota Camry with a four-cylinder engine. According to the analysis, its decent 24 mpg doesn’t make a big enough difference to offset the increased owner costs.
CR’s experts looked at alternatives to a V8 Chevrolet Tahoe that got 13 mpg and to a truck-based V6-powered Ford Explorer that got 15 mpg. With high gas prices, owners of both vehicles are experiencing significant costs due to low fuel economy and significant depreciation.
To ease the transition, CR compared them to the 17-mpg Honda Pilot, a well-rated model that requires few compromises in seating and performance. But the fuel economy gains aren’t nearly enough to offset the Pilot’s predicted depreciation and tax costs when trading in one of these 2005 models after only three years.
THE BOTTOM LINE
Consumer Reports’ longstanding advice has been to buy the highest-rated, most reliable and safest model with good fuel economy that suits your needs. Consumer Reports’ experts support the move to more fuel-efficient vehicles but caution consumers to look at their long-term owner costs and not to rush into a change they might later regret.
Visit the Consumer Reports Web site at www.consumerreports.org.