Sunday 24th of January 2021

Downsize Your Automobile to Save Money

As the national average price for a gallon of gas hovers at $4 per gallon, more and more Americans are trading their larger automobiles for smaller cars in the interest of fuel economy. Although that seems like a financially sound goal, getting rid of your big vehicle too soon could end up costing you more in total ownership costs than you would save on gas. In the long run, downsizing does pay off, but your timing is critical.

Extinction of the SUV

Between a growing concern about global warming and skyrocketing gas prices, it’s no surprise that smaller cars are in higher demand these days. Recent sales statistics indicate that the sales of trucks and SUVs are down considerably, while the sales of hybrid vehicles and small cars are on the rise. For example, General Motor’s Hummer division reported that sales were down 45% in April of 2008 compared to the same month the year before. By contrast, sales of the hybrid Toyota Prius jumped by over 54% during the same time period.

Ownership Costs vs. Fuel Savings

A new study by Consumer Reports revealed that it doesn’t pay off to downsize your vehicle if you’ve only owned it for a few years. Consumer Reports compared the cost of owning a three-year-old, fuel-thirsty vehicle with those of trading it in for a smaller car. The most important costs to consider when you trade in your larger vehicle are depreciation costs and finance charges. If you still owe money on your current car loan, it might not be worth it to downsize at this point. For one, you might face prepayment penalties, and you will have less equity in your car to apply toward the purchase of a new vehicle.

The other main factor in downsizing is depreciation. Depreciation refers to the decreasing value of your vehicle over time. On average, depreciation accounts for 48% of ownership costs during the first five years you own the vehicle. Fuel costs, on the other hand, only account for 21%. The biggest depreciation occurs in the first three years, after which it levels off. Thus, if you trade in a vehicle after only owning it for three years, then you go from the most expensive stage of owning a car right back into the beginning of that stage with the new car. Changing vehicles too quickly means you forego the benefits of long-term ownership; namely, reduced annual costs.

What to Consider before Downsizing

Here is a list of expenses you should consider before you downsize your automobile

  • Depreciation
  • Interest charges on financing
  • Fuel costs
  • Insurance costs
  • Sales tax
  • Maintenance and repairs
  • Prepayment penalties on your current auto loan