Downsizing your car – when does it make cents?

Last month, we published a report on "When to downsize your car" exploring the financial realities of trading in a large vehicle early in the ownership cycle on a new, more fuel-efficient one. The findings are counterintuitive, suggesting that even owners of large trucks and SUVs might be better off holding on to their three-year-old vehicle for another year or two before selling it.

There has been tremendous interest in this subject, warranting another look at the topic to address perspectives raised by readers and the media, including ABC News, CBS Morning Show, NY Times,  Washington Post, and many other outlets. As with other studies conducted at Consumer Reports, the final story summarized the findings from a veritable mountain of data. Over a several blog posts, I’ll dig deeper into our data to illustrate the concepts from the original article and clarify the advice to help you make the right decisions for your situation.

The miracle of downsizing
First off, I want to restate that Consumer Reports strongly recommends that everyone purchase a good, reliable, safe, and fuel-efficient car. With the numerous lists and powerful, interactive tools at ConsumerReports.org, you can quickly narrow your list down to vehicles that truly meet all those criteria. Regarding downsizing, we have always maintained that people should buy the most miserly model that satisfies their needs. And in every vehicle category, there are models at both ends of the fuel-economy spectrum.

Secondly, at the heart of our latest research is a cautionary note for those who have owned a vehicle for three-years or less and are still making payments: carefully consider the short- and long-term financial impact of trading it in. We hope all motorists move to more fuel-efficient models but suggest that they do so only when the timing is right.

Why downsize?
Of course, people are motivated to downsize by escalating fuel prices at the pump. But many consumers are feeling the economic squeeze on other fronts, leading them to want to also decrease their monthly car payments and possibly their insurance premiums. Those feeling the pressure on multiple fronts may be the most vulnerable to making a rash trade-in decision that hurts them in the long run.

Why not dump my SUV now?
If you’re just partway through a car loan, you may not have much equity in that gas guzzler due to hidden costs. We’re all too familiar with weekly gas costs and monthly payments, but the real dollars move silently behind the scenes. The biggest of these hidden costs? Depreciation. On average, depreciation now accounts for 46 percent of the owner costs over a typical five-year ownership period, with interest adding another 12 percent. (Fuel accounts for about 26 percent, on average.) So the bulk of your investment in this depreciating asset is quietly melting away, while you focus on the fuel costs.

In our analysis, we found that downsizing now may save $1,000 or more a year in fuel costs. Sounds good on the surface, but it’s a drop in the bucket over the long haul.

Consider that interest is stacked so the monthly payment has more interest in the first month than the last. And a vehicle depreciates greatly in year one, then less so with each successive year. Likewise, buying a new car means paying sales tax in most states. Trading in early, therefore, means moving from the most expensive period of ownership on one vehicle into that of the next.

To flip this around, if you asked, "What could I do to waste as much money as possible on a car?" My answer would be to buy new, finance it longer than you plan to keep the car, and then trade it in on another new car. This is exactly what we’re cautioning you against now.

We’ll dig into the numbers and explore the tipping point for selling your gas guzzler in the next installments.

—Jeff Bartlett

For tips on saving gasoline with your current vehicle and advice on buying a fuel-efficient car, see our green car guide.

Comments

[Ed]

The problem with this argument is that you guys are comparing gas-guzzlers to gas-guzzlers. I believe you compared something like a suburban that get 15 to the gallon to a honda pilot that gets 17. Well gee whiz I wonder why buying a new car is not worth it. Most people who buy large SUV's do not need that large of a vehicle. How many people actually seat 8 people on any sort of regular basis? Even if you do need that amount of volume, if you compare the suburban to say, a Honda Odessy your looking at 20 mpg. Since most people also do not need gigantic "mini" vans like this either, how about a practical toyota camery, STILL A VERY LARGE CARE by global standards. that would average 25 to the gallon. I think this article misses the point of "down sizing" your vehicle. It is not just buying a newer, expensive, "fuel efficient" if a honda pilot could be called that vehicle. Down sizing is about reassessing your ACTUAL needs. Gas will be at 5$ a gallon by the middle of summer with memorial day prices shaping up to be close to $6. STOP DRIVING HUGE VEHICLES. Duh!

[Jeff Bartlett - Consumer Reports]

Ed - In our original report, we looked at progressions for consumers, considering likely and reasonable compromises. So, in the Tahoe example, we moved down to a Pilot as a first move. We also explored the scenario of switching to a RAV4, assuming three-row seating and AWD were prime motivators. The article said, and my blog series reiterates, consumers who are willing to make the greatest sacrifices will see the greatest monetary benefits. However, I realize people purchased their current vehicle because it fulfilled a need, and likely one that hasn't changed. In the case of families, for instance, kids tend to grow...

I agree. At the core of downsizing is striking a new balance between your "needs" and "wants." Hopefully these stories will help readers think through their own scenarios. ConsumerReports.org has many tools, such as owner cost data, that can help sort through individual circumstances. Downsizing is good, right-sizing based on careful research is even better.

[Scott]

Uhh, Ed, did you do the math? Using your examples and going from a Tahoe at 15mpg to a Camry at 25mpg, and assuming, say 15,000 miles per year (more than average), that's a 400 gallon per year savings. So, let's be generous and say $6 per gallon you save maybe $2400 per year. On the other hand, it probably cost you $20k to buy that car (after tradein), so you're looking at a good 9 years or more to pay back the investment (ok, if you paid cash, maybe only 8). Most people will not have even that short of a payback period (and anyway probably don't hold on to their cars for 9+ years). So, basically, what the CU people say is: Wait until you're going to buy a new car anyway and *then* think hard.

[Adam]

Scott, you might want to check your math. Cars.com "Target price" for a well optioned, V6 Camry with 6 speed auto is $27,000. Trade in on an 05 Tahoe in good condition is 12K and change. You're only paying $15k for the car, and in 5 years the depreciation on the Tahoe will mean it is worth much less than the Camry.

If CR wanted to do a fair condition, they would also look at the used car market. Compare a used 2005 RAV4 with the Tahoe, and the savings would be immense!

[Michael]

I just came back from looking at a 1998 BMW 328i in really good condition for just under $8,000.

I currently own a 2004 Touareg that I bought 18 mos. ago for $30,000.

I think making this trade makes financial sense and encourage other drivers interested in downsizing to do something similar.

[joe]

I own both a Civic and a Pilot. The Civic commands a ridiculously high tradein value. In the real world new Pilots are being heavily discounted, six thousand or more. New Civics are just plain not a good deal now. Your argument to hold is even more compelling in light of the high price of popularity.

[Bev M.]

Our situation is a bit unique, in that we're considering trading in my gas-guzzling Odyssey, for which we have no loan, for a Prius. Trade-in for the van is about $17,000 and the cost of a new Prius (very hard to find a used one, which I take as a good sign) is about $27,000 for the model I want. Since my husband has started riding his motorcycle, we also have a truck we don't use (no loan for that, either), which we're making monthly insurance payments on.

Our idea is to trade both the van and the truck in for the Prius. I drive about 7,800 miles a year, so we figure on saving about $1,700 on gas alone in the first year, and an additional $1,500 on insurance for the truck. Rumor has it that the Prius is less expensive to insure than the Odyssey, but I haven't verified that. But, we're looking at saving at least $3,200 a year.

Our situation seems almost too good to be true, and I'm really questioning it, to make sure that there's something I'm not missing. Please keep these articles coming, because I want to consider every possibility before I make the final decision. Thanks!

[Darren Crotchett]

Interestingly, I did a spreadsheet on this very subject. I own a 2000 Jeep Grand Cherokee that I paid cash for for about $7500. I considered buying a Prius vs. a high mileage car like a Civic vs. just keeping my truck. I found that considering the additional cost to gain 20 miles per gallon, it would take years to break even, and gas would have to go to about $11.00 per gal during that time, too.

Granted my numbers might have had mistakes. Even so, The costs were obviously greater too great to make trading in worthwhile.

[everett whitney]

TO: Bev M. - 16 June .. "trade-in two on a Prius ..."

One will NEVER come out ahead trading two vehicles!

You must realize that whatever you used to determine the relative worth of that truck & Van is horribly out-of-date!

All such vehicles are essentially dropping in "worth" weekly! Some dealers will NOT even accept trucks @ any pricing.

You've waited 8 - 10 months too long to be starting this endeavor .... all PRIUS units have already been 'sold out' with an extensive waiting list ahead of you, with many ready & willing to pay a premium above MSRP.

Depending upon your vehicle registration rules in your state, just re-register ( our state has a black registration for storage) that truck so that the insurance may be legally cancelled. Otherwise, try to sell it privately, realizing that it will be FAR less than you are thinking.
Certainly, changing to a single vehicle is fantastic & should be done everytime it's possible.

There will be NO number of years in the future that will be sufficiently long enough for the "project" to be savings Vs Expenses neutral, let alone $3,200 annually positive!

[RJ]

"All such vehicles are essentially dropping in "worth" weekly! Some dealers will NOT even accept trucks @ any pricing."

My wife went to the dealership to trade in her SUV and what they offered her would be laughable if it didn't make us cry. The saleman said its value was only going to plummet (much more than the expected depreciation), and I beleive him. In my mind that means we can take a big loss now and be saving on the gas in the meantime, or a potentially bigger loss down the road and continue to pay a ton for gas that whole time. :(

[Ed]

Just as the big American automakers should have been investing in the future, so too should people who bought huge SUVs from them have know that gas would just keep going up and their status symbols would be turned into three tone paper weights.... Guess that was a bad choice huh?

[everett whitney]

"Food For Thought" to J.R. & Bev M.-if not "NOW"...when ?

Of course, anytime one drastically alters or changes their previous lifestyles it is always traumatic in addition to just the financial aspects !

Within many large cities, people are moving permanently back from a 60 + minute commute location.

Still in the infancy stages, there is some activity in buying otherwise currently " unsellable " vehicles specifically for shipment directly out of the U.S..

R.J. is absolutely correct --- biting the bullet now and getting into a totally-different unit will obviously start the process of reducing fuel costs within the household budget.

Not all must have a "PRIUS!" Just a Honda Fit, etc., will also be appropriate.

BUT - for most of those that HAVE purchased these 8-9 Million annually SUVs / 4WD crew cab pickups year in / year out, they simply have to realize that 'cheap fuel' is gone permanently & not just a phenomena for the time being!

[bp]

Don't know where u got ur data from but my 05 cobalt manual trans. gets 40 mpg on the interstate. I've talked to other people with autos. and they get up to 34 mpg

[Kim Malone]

Hi. My husband is pressuring to get rid of our gas guzzling V* 8.1 cylinder engine Yukon XL. We bought it originally to camp but are now thinking to leave it at a campsite. The problem is I love the beach and want four wheel drive. He wants a mini van which guzzle gass too. I don't know what to do.We only owe 7K on the Yukon which we have had for about 5 years. It has about 98,000 miles on it. The dealers don't want to give us anything for it ...maybe 10.. What is the best decision? We have one more year of payments. I don't really want another car payment and I don't want to drive a crap box. Even the mini vans are 20K used. Any suggestions? Help?

[Dave Mason]

I drive my 2007 Honda Ridgeline 30,000/yr and my wife drives a 1999Taurus wagon 20,000. I need the ridgeline for my second job, but we can share a small hybrid for our primary jobs. We're looking at getting on the waiting list for a 2009 Civic hybrid, which will log about 40k annually, and probably more than pay for itself.

If you like your big SUV, it may be worth waiting a couple of years for the hydraulic hybrids. Imagine that Yukon getting over 50 mpg city!

[Nancy Carnahan]

Does it make sense to keep the "paid for" guzzler, use it A LOT less, and buy a hybrid in addition for daily use?

I am working mother to a family of six (four sons ages 14, 11, 9, and 4 plus my husband and I.) I currently drive a 2003 Toyota Sequoia (paid for about 2 years ago). My husband drives a 2006 Toyota FJ Cruiser that is leased until next March. I put about 19,000 miles a year on my car (a little over half is work related) and my husband puts about 12,000 miles year on his, 85-90% work related. We live in a suburban area and each have a 4 mile commute to our office, but our children each attend different public schools and preschools scattered around town, which start at different times of the morning and none ride the bus to or from school, so there is a lot of pick up and delivery during the school year. As fuel prices have increased, it has come to my attention that only about 10-15% of the time, are we all six in the car together, primarily for church, a trip the movies or out-to-eat, weekend trips to the lake or my mother's house 30 miles from here, or on a vacation. Thus, I have concluded that this gas guzzler (averages 14-16.5 mpg depending on how much highway driving is in the mix) is unncessary most of the time. Moreover, for a Toyota, the Sequoia has begun to require a surprising amount of expensive mechanical repairs (about $2800 since January). Rather than ridding ourselves of the Sequoia, we are considering buying a Hybrid (probably a Honda Civic, which I have managed to a couple of dealerships who are selling them for sticker --let me know if you think I could do better) which I would drive most of the time, and we would use the Sequoia only when we have to carry more than 5 of us or have a friend to carry around or something.

My husband thinks maybe we should wait until his lease is up on the FJ Cruiser to do this, but during the 3 months we have been considering this plan, I have seen the price and the availability of the Prius go from $400 over invoice in March (my college roommate smartly ordered one in March at this price), to a waiting list of 100 people by June to order for a Prius that they hope to get 3-4 months from now for MSRP. It's a little faster to get a Civic Hybrid (maybe a month or so) though I would still have to pay sticker (around $23000 for the base model).

My fear is that by waiting until the Spring, as gas prices continue to increase, the price for next year's Hybrid models will increase and/or the demand will be such that they are simply not available for the foreseeable future, and putting this plan into place will become either more expensive or downright impossible. Increased insurance costs would be about $60/month, according to my carrier, and I have saved enough that I could probably keep a car payment down to $300ish on a 3 year loan.

Is there a good reason not to do this? Am I missing something? If gas gets to $5 (or, God forbid, $6) a gallon, and hybrid prices go up or they are simply not available due lack of supply to meet demand, I think this will like it was a "no brainer" but I am still having trouble pulling the trigger.

Anyone have advice on this situation or facig same/similar situation?

[Joyce Owsley]

I just made the last payment on my 2003 Toyota Tundra. With a tune-up and slowing down to 60 mph, my gas mileage is around 19-20. I'm keeping it and am just giving more thought to how much I'm driving. The only thing it's costing me now is gas, oil changes and insurance. That's cheap compared to a new vehicle of any kind.
I think everyone is just going to have to figure out what works best for their situation. We'll all adjust and life will go on until the next crisis.
However great the pain at the pump today, we must remember that fossil fuels are a nonrenewable energy source and someday we will all need to find a way to move around that doesn't involve gasoline. We can drill everywhere for more oil, but it too will be gone and then what are we going to do?
My plan to keep my truck is ok as long as I can get gas when I need it. But what happens in 10 or 20 years when the shortages are more severe? My old, fat butt may have to get used to a bicycle seat!

[Amy]

We're downsizing as well. Just put a deposit in on a 2009 Honda Fit Sport. Now the decision about which car to sell--the 2005 Odyssey or the 2005 Subaru Legacy GT turbo wagon. Both get precisely the same mpg. Odyssey feels HUGE, while Subaru is zippy and fun. Subaru has 4WD, Odyssey is FWD. We have 2 kids in booster seats, so don't need the space in the Odyssey except for long trips and carpooling. Which to sell? Which to keep? We can't decide. Advice is welcome.

[Frederick Lurenz]

All,
This a great article for people who use credit. How would you use this information if you have paid off cars? I have a 2006 Nissan truck thats paid off and worth around $10,000.00. Should I buy a small used Honda fit or other fuel efficient vehicle? Thanks Frede

[Kevin]

Would it be possible for the author to do a quick re-hash of costs of trading down early in the ownership cycle, with the current gas prices (around $2.00 per gallon)?

Thanks