Is downsizing best for your wallet?-Study analyzes savings at pump vs. new car cost

With the national average gasoline price hovering at about $4 a gallon, many consumers are trading in their larger vehicles for smaller models with better fuel economy. While that is a good goal, making the switch too soon could cost drivers more in overall owner costs than they’ll save at the pump, according to a new Consumer Reports study.
Recent sales figures show that sales of large SUVs and pickup trucks are down dramatically, while small cars and hybrids are gaining popularity.
But CR’s study shows that, in the short-term, it typically doesn’t pay to downsize if you’ve only owned your vehicle for three years, even if the new car’s fuel economy is much greater. Remember, with a traditional loan, interest makes up a larger percentage of your monthly payment initially, scaling down over time. Consequently, less is paid to the principal of the loan in the first year than the last. If you trade in part way through your loan period, you may find you have less equity, or trade-in value, in the model than expected ‘ limiting the potential down payment on the new vehicle.
The other main hurdle affecting your car’s equity is depreciation, or the value a vehicle loses over time. According to CR’s owner-cost estimates, depreciation makes up, on average, about 48 percent of an owner’s total vehicle costs in the first five years. Fuel costs are only about 21 percent, on average. And the greatest depreciation occurs in the first three years. After that, depreciation begins leveling off.
So, if you trade in a 3-year-old vehicle, you begin the wild depreciation ride all over again with the new vehicle ‘ rushing from the most expensive period of ownership of your current vehicle into that of the next.

CRUNCHING THE
NUMBERS
CR analyzed a number of scenarios based on different types of vehicles, including sedans, SUVs and pickup trucks. For each type, CR chose a typical large model and progressively smaller, more economical alternatives that would be logical choices for downsizing.
The financial models are based on CR’s owner-cost data, which includes: depreciation, fuel costs (based on 12,000 miles a year, Consumer Reports real-world overall fuel-economy test results, and CR’s estimate of the national average gasoline price for May 2008, $3.75 a gallon); interest on financing (national average rates from 2005 and 2008, applied to 60-month terms); maintenance and repair (based on survey responses from 675,000 Consumer Reports and ConsumerReports.org subscribers); insurance costs (derived from quotes and Insurance Institute for Highway Safety data; and sales tax (using the national average).
CR evaluated downsizing from the 2005 Ford Five Hundred (now called Taurus), which got 21 mpg overall in CR’s tests, to a 2008 Toyota Camry with a four-cylinder engine. According to the analysis, its decent 24 mpg doesn’t make a big enough difference to offset the increased owner costs.
CR’s experts looked at alternatives to a full-sized Chevrolet Tahoe with V8 engine that got 13 mpg in CR’s tests, and to a truck-based V6-powered Ford Explorer that got 15 mpg. With high gas prices, owners of both vehicles are experiencing significant costs due to low fuel economy and significant depreciation.
To ease the transition, CR compared them to the 17-mpg Honda Pilot ‘ a well-rated model that requires few compromises in terms of seating and performance. But the fuel economy gains are not nearly enough to offset the Pilot’s predicted depreciation and tax costs when trading in one of these 2005 models after only three years.

THE BOTTOM LINE
Consumer Reports’ longstanding advice has been to buy the highest-rated, most reliable and safest model with good fuel economy that suits your needs. Consumer Reports’ experts support the move to more fuel-efficient vehicles, but caution consumers to look at their long-term owner costs and not to rush into a change that they might later regret.
Downsizing is good. Just make sure you are doing it when the time and finances are right.

Visit the Consumer Reports Web site at www.consumerreports.org.