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Friday, April 15, 2011

How to know when it’s time to downsize your car

How to know when it’s time to downsize your car

With gasoline prices stretching toward $4 a gallon and beyond, many Americans are thinking about trading in big cars for something a little more fuel-efficient. In a recent poll conducted by the Consumer Reports National Research Center, more than twice as many consumers said they’d choose a small car as their next vehicle, as would choose a small, midsize or large SUV; a minivan; or a pickup.

But there’s a lot to consider before you decide to trade in your old gas guzzler: 
  • How much utility are you willing to sacrifice in the quest for mpg? You might save thousands of dollars a year trading your Suburban for a Subaru, but if you can’t fit everybody in to go on vacation, you’ll likely be miserable and want to trade back as soon as gas prices go back down.
  • How much gas will you really save? Will the new car really get the mpg you want? We’ve found in our testing that real-world overall mpg (combining city and highway mileage) is often considerably less than the EPA highway mileage figure that manufacturers advertise.
  • Most importantly, will the money you save on gas make up for the increased depreciation on buying a new car? In our previous analysis, we’ve found that downsizing to a new car rarely pays off, unless you’ve owned your car for several years and were planning on buying a new car anyway.

To really understand the financial impact of trading a car for a smaller model requires understanding the factors that go into cost of ownership more broadly.

Consumer Reports calculates owner costs for every vehicle on the market. The factors that go into our owner cost estimates include:

Depreciation (calculated from CR's Auto Price Service data).

Fuel costs (based on 12,000 miles a year, Consumer Reports real-world overall fuel-economy test results, and our estimate of the national average gasoline price of $3.60 a gallon).

Interest on financing (national average rates from 2005 and 2008, applied to 60-month terms).

Insurance costs (derived from quotes and Insurance Institute for Highway Safety data).

Maintenance and repair (based on survey responses from 675,000 Consumer Reports and subscribers).

Sales tax (based on the national average)
Operating expenses, such as fuel, insurance, maintenance, and repair costs slap you in the face every time you write a check. But the other expenditures, known as carrying costs, are more subtle. They slowly erode the value of the car-and your bank account- over time.

By far the largest cost of owning a car is depreciation, the chief carrying cost. Depreciation accounts for almost half the cost of owning a car over the first five years of ownership, with the biggest hit coming in the first few years. That’s why trading in your car early smacks you a double whammy on depreciation. First, you’ve already paid the biggest chunk of depreciation on your old car. Then, you’ll pay the biggest chunk on your new car, as well.

Fuel costs come in a distant second in the bite they take out of your wallet. But even at $4 a gallon, unless you buy a car with dramatically better fuel economy than your old one, the savings over a typical ownership period can be slim. (See our annual fuel savings by mpg chart for examples.)

Our survey respondents said the median fuel economy they got in their current car is 23 mpg. And our tests show that to save even $500 a year over a 23 mpg car, your choices would be limited to hybrids, diesels, and a handful of small cars that get more than 29 mpg overall.

And that’s the other downside of downsizing. Most small cars that get especially good fuel economy sacrifice space for families and versatility for occasional hauling needs.

In general, trading a vehicle that gets very low mileage for one that does somewhat better will yield greater savings than trading a car that gets decent mileage for a first-class fuel miser. That’s because miles per gallon is not a linear measurement. In annual consumption, the difference between going from a 14 mpg SUV to a 19 mpg SUV will save you more fuel-and money-than going from a 23 mpg car to a 29 mpg car.

MPGGallons per 100 milesFuel cost for 12,000 milesCost savings from 5 mpg gain

So, there’s a lot to consider if you’re thinking about downsizing your car. To help, we’ll look at examples of downsizing that do save you money, some that don’t, and provide a list of vehicles that offer the most utility for the money. Through the series, we’ll provide some extreme examples of downsizing, provide the numbers to show how long you should wait before downsizing, and explore whether it makes sense to trade for a higher mpg used car to save on depreciation.

So come along for the ride and we’ll save you some bread. If you have your own downsizing story, please share it with us in the comments below. We look forward to the trip.

—Eric Evarts

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