Downsizing—The long-term implications for trading in early

In the second part of our blog series on downsizing, we'll dig into the numbers behind the "When to downsize your car" report to further illustrate the implications for trading in early.

We left off by explaining why you shouldn’t trade in your large, gas-guzzler early. Now we will explore the scenario of moving from a 2005 Chevrolet Tahoe LT 4x4 to a 2008 Honda Pilot EX-L, a more fuel-efficient model that represents a reasonable compromise with all-wheel drive, eight-passenger seating, and decent tow capacity.

Downsizing SUVs—Show me the money
In this hypothetical scenario, a customer bought a popularly equipped 2005 Tahoe new for $45,390, putting 15 percent down and financing the rest for 60 months. Looking to trade it in three years later, we find this owner has only about $4,750 in equity in the Tahoe to apply toward purchasing the new Pilot after the remaining loan balance is paid off.

This is the eye opener for many consumers; just because you have a big vehicle in the driveway doesn't mean it makes sense to swap it out for a smaller vehicle. Often times, another loan will be necessary and therefore no real reduction in monthly payments is feasible, unless the loan terms are extended. (Already sensing this isn’t an easy money-saving change?)

Buying the Honda brings about $1,700 in sales tax, based on a national average. Roll that into your loan and the impact will be stretched over five years.

In the first year, we predict the Pilot will depreciate $9,000. The total cost for that first year with the Pilot is $15,250, compared with $10,250 for the Tahoe.

Over time, the Pilot's cost per year will decrease significantly. The depreciation rate will slow and by year five the loan will be paid and there will be no more interest charges. Of course, the Tahoe would be paid in just 24 months from now; choosing to purchase the Pilot will lead to three more years of payments.

What are your downsizing goals?
If you need to save money today, then downsizing can accomplish that only if you make great sacrifices. If you can look a few years down the road (see chart below), you will understand that trading in early may not be the best option.

Based on our June numbers of $4.00/gallon and CR overall fuel economy results, the cost to fuel the Tahoe for 12,000 miles is about $3,700. At 17 mpg, the Pilot would cost $2,800—not a huge difference. Downsize all the way to a Toyota RAV4 V6 and the fuel bill would tally just $2,200.

Those fuel savings will not offset the hidden costs (depreciation and interest) for years in this example, unless fuel prices continue to skyrocket.

12-month costs at $4.00/gallon

Model year/ Make/Model

Retail price

MPG

2009 total owner cost

2010 total owner cost

2011 total owner cost

2012 total owner cost

2013 total owner cost

2005 Chevrolet Tahoe LT 4x4	$45,500	13	$10,250	$19,500	$27,500	$34,500	$41,500
2008 Honda Pilot EX-L AWD	$34,750	17	$15,250	$24,250	$32,250	$40,250	$47,500
2008 Toyota RAV4 Limited V6 AWD	$30,250	22	$12,000	$19,500	$26,250	$32,750	$38,750

When is the tipping point for downsizing?
We have heard this question a lot in the past two weeks, and the answer is always: it varies. Truly, it depends on how extreme the move is to downsize. A less expensive, more fuel-efficient model with lower five-year owner costs will pay off more rapidly than a vehicle with only modest sacrifices.

With this scenario, comparing keeping the Tahoe versus trading in on either the Pilot or RAV4, we calculated out the estimated annual owner costs for years to come. What we found is that the cost to own the Tahoe and the RAV4 from now through 2010 would be about same at $19,500 each. Owning a 2008 Pilot for two years would cost an estimated $24,250.

So, to trade now on the RAV4 would start to make financial sense within a couple years. Looking further out, the RAV4 starts to cost slightly less with each passing year.

The Pilot does not have that crossover point, having a higher cumulative ownership cost over the next five years.

Should gasoline rise to $5 this month, and stay there, the scenario changes, though only slightly. Measured beginning today, the RAV4 costs less to own after just 24 months than the used Tahoe, giving the RAV4 a $1,000 advantage that increases over time. Look at the costs in 2011, and the RAV4 has a dramatic lead at $27,750 versus $30,250. Again, looking out five years, buying the Pilot versus retaining the Tahoe never adds up.

12-month costs at $5.00/gallon

Model year/ Make/Model

Retail price

MPG

2009 total owner cost

2010 total owner cost

2011 total owner cost

2012 total owner cost

2013 total owner cost

2005 Chevrolet Tahoe LT 4x4	$45,500	13	$11,000	$21,250	$30,250	$38,250	$46,000
2008 Honda Pilot EX-L AWD	$34,750	17	$16,000	$25,500	$34,500	$43,000	$51,000
2008 Toyota RAV4 Limited V6 AWD	$30,250	22	$12,750	$20,500	$27,750	$35,000	$41,500

Bottom line
To save big in both fuel bills and long-term owner costs takes a significant sacrifice in downsizing. A modest move down one vehicle class may not be enough to create sizable savings.

In the end, reducing owner costs comes down to holding on to your car for more than three years. And in choosing your next ride, look for a model that performed well in Consumer Reports tests, has average or better predicted reliability, a good overall safety Rating, fuel economy at the top of its class in our testing, and average or better estimated owner costs. There are a lot of factors to consider, but this information is readily available at ConsumerReports.org and the New Car Selector tool can help you quickly assemble a shopping list to research further.

In part three of this downsizing series, I will explore the numbers if you downsize to the extreme.

—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]

Ya, that... or just don't buy an SUV. Sell the gas-guzzler for whatever you can get and buy a corolla.

[Rangachari Anand]

I think most people exaggerate their need for pulling a trailer or hauling a lot of people. If you need to carry many people, get a minivan. Forget about towing - nobody will be able to afford a boat anyway :-)

[patty]

What ishe scenario if I pay cash for all my new cars? I have a 2002 Deluxe equipped Highlander. Paid cash, plan to pay cash to downsize to the Rav4 V6. Should I not being doing this move and why not? KY car taxes are ridiculis anyway, that and probably some insurance costs would be the largest expense.

Please advise. Having trouble finding my Rav4 V6 in stock in the Northern KY and Southwest Ohioareas.

Thank you,

PJR

[everett whitney]

TO: Patty-14 June ...." All Cash ..."

Since you are already planning on a replacement, why not put your deposit in on a PRIUS Hatchback & when it arrives, sell your Highlander privately { in case you weren't already planning that already}?

Our nation's decade obsession w/ "SUVs" - large or otherwise - has finally ended! Your tentative V-6 Rav4 will NOT be significantly less costly to operate annually than what you have had plus that buying price will be on a 'par' w/ the Prius, even that Touring version.

Just "relearn" what to carry/transport somewhat & that hatchback with the folding seat will do the tasks! Even more outstanding will be the PRIUS' value whenever you do renew IT in your 5-6 years cycle!

Do remember the 8 years/100,000 miles warranty! Essentially expense-free... only the oil/filter & subsequent entry into the Toyota database....