Trading in on a Small Car Could COST You Big Money

May 22, 2008
Smart fortwo

Smart fortwo

If you want to get a sense of what’s happening in the U.S. new car market, just ask Alan Mulally. The CEO of Ford Motor Co. has just ordered a sharp cut in production for the rest of the year, almost all of it on the truck side of the automaker’s assembly line equation. The bigger they are, it seems, the harder they fall, with full-size pickups alone dropping from 11 percent of the American market to just 9 percent in a matter of weeks.

It’s no surprise that motorists are downsizing their purchases. Those who own Explorers are trading in on Ford Escapes. Toyota Highlanders are going back in trade on the smaller RAV-4.

But think first before you rush to swap for a smaller, more fuel-efficient vehicle, according to a new study by Consumer Reports. The trade group says you might not save the money you anticipate.

The organization says, “it often doesn’t pay to downsize if you’ve only owned your vehicle for three years or less and haven’t paid off the loan, even if the new car’s fuel economy is much better.”

There are several reasons why. For one thing, you may wind up “upside-down” on that loan – owing more on your old car than you’d get on a trade-in. That could more than offset your savings. And these days, bigger vehicles, especially trucks, are suffering from a sharp downturn in trade-in value, as we reported on The Car Connection a few days ago.

Consumer Reports notes that depreciation accounts for 48 percent of the cost of ownership during the first five years of a vehicle’s life. Even with record gas prices, fuel accounts for just 21 percent. So if you have had your vehicle only for two or three years, you may save significantly more by holding onto it for another year or so.

Consider this example: a 2005 Ford Five Hundred SEL V6 sedan got 21 mpg overall in Consumer Reports’ testing. The 2008 Toyota Prius got 44. Assuming 12,000 miles per year at the current national average for gasoline of $3.75 per gallon, the Ford will cost about $2,000 in gas this year, while the Toyota will cost just $1,000. But factoring in all of the owner costs of trading in the Five Hundred now, the Toyota will cost about $9,000 to own for the first 12 months, while the Ford costs $6,000. That’s a difference of $3,000, or $0.23 per mile.

“These hidden costs may be the factors you are least likely to focus on when downsizing,” said Rik Paul, automotive editor of Consumer Reports. “After all, depreciation and interest are less tangible costs than the high price for a gallon of gas that slaps drivers in the face with each fill up.”

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