As we go to press with this newsletter the national average gas price for regular unleaded gasoline is $4.00 per gallon, down from $4.12 a couple weeks ago. Folks who squirmed a little as they drove their Hummers or Suburbans a year ago are screaming and thrashing now. Everyone’s thinking about dumping their guzzler and jumping into a pocket rocket, but does it really make sense to trade in your 6 MPG monster for a 60 MPG squeaker? Wait, is this Tom Dwyer talking? Ecological, socially conscious Tom? Yes it is, because although as a society we obviously need to reduce our consumption of fossil fuels, it may not make sense on a purely individual basis. Just as it wouldn’t be wise to refinance a house if you don’t plan to be there long enough to wipe out the closing costs, it might not make financial sense to trade in Carzilla if you expect to cover the change through fuel savings alone. It’s important to consider all the reasons and costs involved with a trade-in, and put pencil to paper before making any commitment.
Painful as it is to pay for the gas, there may be reasons to avoid the cost and hassle of trading in. If you mainly use your beast for runs to the neighborhood grocery store then you might not register enough miles for fuel efficiency to be a problem. Other drivers might actually need the room of a large car because of a large family or for business reasons. Still others need powerful engines, rear-wheel drive, or 4-wheel drive for towing or recreational reasons. If none of these apply to you and the only reason for you have for owning your gigantomobile is style, then there still might be reasons to avoid the car lots.
Until recently, if you wanted to move from a large SUV to a smaller car you might have the trade-in value to cover the cost of the new car, but increasingly that’s not the case. Other people have noticed the high price of gas too, and it’s affecting their buying decisions. Demand for big cars is plummeting and their prices are falling as well. In the first quarter of 2008, SUV sales dropped 28% but sales of subcompact cars rose 32%. SUV owners have experienced an 8% depreciation in just the past six months (a drop that usually takes a year), while hybrids buyers are paying premium prices and waiting months for their cars. This imbalance means rock-bottom prices for SUVs, which is great if you want to buy but horrible if you want to sell. You might be shocked at what your trade-in is worth, even if it is newer and in good condition. For example, a 2005 Hummer H2 sold for $55,735 new but the current Blue Book value is $19,440, a drop of over $36,000. If your car isn’t paid off you might even be “upside down” on your current auto loan, owing more than it’s worth. If that’s the case then you’ll be covering the difference in your current loan plus the cost of the new car; an expensive proposition.
Here’s some numbers for an example. A big SUV like a Ford Explorer gets about 16 miles per gallon, while a hybrid like a Toyota Prius averages about 47mpg. Drivers average 15,000 miles per year nationally, so assuming $4.25 gas an Explorer costs about $3,984 per year for fuel while a Prius costs about $1,356. A $2,628 fuel cost difference looks pretty attractive, but it’s only part of the story. If a 2005 Explorer has a resale value of $9,831 and a 2008 Prius has a cost of $23,589, then it will take 63 months to pay back the difference through gas savings alone. If you’d like to run the guzzler/sipper comparison between your own car and one you’re considering, you can go to http://www.edmunds.com/calculators/gas-guzzler.html to see a caluclator that will help.
Finally, there’s the opportunity cost of the money. Today’s average car payment is about $400 per month for 5 years. Remember that $2,628 fuel cost difference between the Explorer and the Prius? It adds up to a savings of $13,140 over 5 years. Nothing to sneeze at, but if you take that $400 per month and invest it at 6.5% compounded monthly for the same 5 years you would have $28,269.59, which would buy an awful lot of gas.
Unless there is a huge mileage difference between the cars you’re considering, or if you have a large trade-in value in the car you’re driving, or if you were about ready to change cars anyway, it probably makes the most sense to sit tight in the car you have for now. If you drive a mechanically sound car and maintain it well, it should respond with reasonable mileage and minimal environmental impact. If you can make it last until the next-generation full-electric vehicles come out, that would probably be the time to change. Just as SUV owners are getting stuck with their gas hogs now, you don’t want to be stuck trying to sell a Prius with $10,000 of payments left on it when everyone else wants electrics!
