High Gas + New Loan = Bad Idea?

by Valerie Menard

Selling a large vehicle to save money on fuel may be tempting, but there is more to consider than just the price of fuel. The cost of the smaller car could outweigh the savings.

Desperate times require desperate measures. The unruly petroleum market continues to push consumers past their comfort zones and into more fuel-efficient vehicles, regardless of lifestyle or need.

While new truck and SUV buyers continue to disappear, current owners are also considering the ultimate sacrifice-–trading in their truck or SUV for a smaller, more fuel efficient vehicle. The immediate relief at the pump may be tempting, but the long-term cost of a new loan may cost more than you would save on fuel.

According to Kelly Blue Book (KBB), which compiles new and used vehicle information, depreciation rates among trucks and SUVs will garner consumers a weaker trade-in value on any new car purchase. The depreciation rate among large SUVs and trucks has dropped to eight percent. While that rate is common over a 12 to 18 month period, the depreciation was achieved in only six months.

There is a bright side, however. KBB anticipates that depreciation will slow and eventually turn around as winter approaches and advises truck and SUV owners to hold off on a vehicle purchase, if possible, until then.

"While it might be tempting to trade-in your big SUV after spending $100 to fill its gas tank, it is important you take everything into consideration before you decide to change vehicles or you may end up spending thousands of dollars to save hundreds," advises Jack R. Nerad, executive editorial director and executive market analyst for KBB and kbb.com.
"For owners who owe more than the vehicle's worth, selling would not be the best economic move. If you owe $20,000 but the vehicle is now appraised at $15,000, you stand to lose thousands."

Before considering any automotive purchase, it's important to do the research. In the case of a trade-in, it's also important to do the math. For example, with gas prices at $4 per gallon, Ford Expedition owners will pay $112 to fill-up the SUV's 28-gallon tank. With an EPA estimated city fuel economy rating of 12 miles per gallon, the Expedition will get 336 miles on one tank. To trade in the Expedition for the Ford Escape Hybrid, for example, would seemingly net the buyer a gasoline bounty. The cost to fill-up the Escape's 15-gallon tank would be $60 and with a fuel economy of 34 mpg in the city, the hybrid could travel 510 miles on one tank, theoretically. While you may get twice as far on half as much gas, the loss of money in the trade may still not justify the dollars saved at the pump.

For owners who have paid off their vehicle, getting back into debt on a new vehicle may not be cost effective either, even if it means more dollars saved at the pump. Truck and SUV owners who purchased these vehicles because of their utility, seating, hauling, and cargo capacity will also lose these assets when trading in for a smaller vehicle.

Still, the pain at the pump and the gain of cash in hand may be enough incentive to switch. Manufacturers vastly underestimated the appeal to consumers of hybrids, regardless of reports at the time that the premium on hybrids would take years to recoup. For consumers who want to help the environment as well as save gas, newer, lower emission vehicles might be enough to tip the scales.

Bottom line: There's a lot to consider when downsizing vehicles. The most important first step is don't panic. Next, consider costs carefully and if paying more now to lighten gasoline dependence down the road makes sense, switch ahead.