Considering Downsizing to Save Fuel? Consumer Reports Suggests it Might be Better to Wait

May 30, 2008

We've been watching gas prices hovering just under $4 a gallon for over a month now, and at last (in my neighborhood, at least), the price of regular unleaded finally jumped a dime to $4.09. It's enough to make a commuter cry. An increase of a dollar a gallon in the last year means each tank is costing $15 to $20 more, or $60 to $80 per month if you fill up weekly.

Sales of trucks and SUVs have already slowed, and small cars hybrids are selling faster than hotcakes. In fact, many hybrids now commanding a premium over the suggested retail price. It only seems natural that drivers are considering trading in their larger gas-guzzling models for something smaller with better fuel economy.

Well, according to a report at Consumer Reports that might not be the best action! In fact, their study shows that it might not pay to downsize if you've only owned your vehicle for three years or less. Pointing out that the hidden costs of car ownership might be the factors owners are least likely to focus on when driven to downsize, Consumer Reports reminds drivers that those hidden costs can have a major effect on your finances down the road. Two important factors to consider when trading in for a new car: your finance charges and the cars' depreciation.

As CR explains, "with a traditional loan, interest makes up a larger percentage of your monthly payment initially, scaling down over time. Consequently, less is paid to the principal of the loan in the first year than the last. If you trade in partway through your loan period, you may find you have less equity, or trade-in value, in the model than expected--limiting the potential down payment on the new vehicle." Depending how much you still owe on your vehicle loan, it might not be worth downsizing to a smaller vehicle after only three years, even if the new car's fuel economy is much greater.

Another thing to consider is depreciation: According to CR's owner-cost estimates, "depreciation makes up, on average, about 48 percent of an owner's total vehicle costs in the first five years. Fuel costs are only about 21 percent, on average. And the greatest depreciation occurs in the first three years. After that, depreciation begins leveling off." So in most cases, depreciation on a new car costs more than the fuel you're putting into it.

Consumer Reports evaluated a variety of sedans, SUVs, and pickup trucks while considering several factors, including depreciation, fuel costs, and interest as financing. They also took into account such other hidden costs as the change in insurance costs, maintenance and repair, and sales tax to establish a total cost of ownership per mile.

To begin, Consumer Reports evaluated the 12-month costs of ownership for three-year-old Ford Five Hundred and Chrysler 300C sedans, Ford Explorer and Chevy Tahoe SUVs, and a Ford F-150 pickup truck, and compared them against smaller 2008 Toyota Camry, Nissan Altima, Honda Accord, Honda Pilot, Toyota Rav4, Nissan Frontier, and Toyota Tacoma. They also tossed in cost-of-ownership figures for 2008 Hybrid Camry and Prius. In almost every situation, the comparison of buying a newer vehicle reveals a higher cost-of-ownership per mile than just keeping the older, less-economical vehicle.

It's complicated, I know. But if you review the detailed charts over at Consumer Reports, and calculate the actual cost per mile, you can definitely see that it might not make financial sense to trade in your three-year-old vehicle for something smaller.

Their advice? "Buy the highest-rated, most reliable, and safest model with good fuel economy that suits your needs... Just make sure you understand the full picture and make sure you are doing it when the time, and finances, are right for you."

By Brandy Schaffels
Editor, AskPatty.com