Junk Your Gas Guzzler?
Large-SUV sales have plummeted 30% this year, large pickups have dropped 22%, and nonluxury large-sedan sales are off by 24%, according to J.D. Power and Associates.
Motor City can't shut down truck and SUV assembly lines fast enough, and General Motors may put the suddenly uncool Hummer brand on the chopping block. Owners of trucks and SUVs are trading them in (when the dealer accepts them) at a breakneck pace.
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Switching to a fuel-efficient car seems like a no-brainer -- for reasons both environmental and economic. But before you shop, crunch the numbers. A smaller fuel footprint makes financial sense if you're going from a bruiser to a fuel sipper. But trading to a vehicle that offers a marginal gain in fuel economy might not pay off anytime soon.
When bigger is better. The numbers don't compute when, for example, you trade a relatively new crossover S'V with so-so gas mileage for a new, small crossover with pretty good gas mileage. That's because cars typically lose 40% to 50% of their value in the first three years of ownership, and interest on a car loan is front-loaded.
Let's assume you bought a 2006 Honda Pilot two years ago for about $29,000 with a five-year, 6% loan and 10% down. Your monthly payments are $505. The average trade-in price today is $18,070, and you still owe $16,590 on the loan. The six-cylinder Pilot gets only 17 miles per gallon in combined city and highway driving, so you're thinking of trading it in for a 2008 four-cylinder RAV4 Limited, which gets 22 mpg.
Sell the Pilot and pay off the loan, and you have $1,480 left over. The RAV4 costs $25,590. The money from selling the Pilot goes toward the down payment, but you finance an additional $1,300 for taxes, title and tags. To keep the comparison nice and neat, let's assume you use a 36-month loan, which will be paid off at the same time as the Pilot loan would have been. Your monthly payment will increase by $268 a month.
Your new loan payments run $3,216 more a year; but at $4.04 a gallon, the annual fuel cost of the RAV4 is $806 less, assuming you drive 15,000 miles a year. After considering the resale value of each vehicle in three years and adding in the estimated cost of repairs once the Pilot is off warranty, you'll be about $1,700 poorer if you buy the RAV4.
When smaller is better. But say you want to trade in an iconic guzzler, a 2006 Chevy Tahoe LS (15 mpg), for a 2008 Nissan Altima S (26 mpg). Again, assume you bought the Tahoe two years ago, for $37,000 with a five-year, 6% loan and 10% down, and your monthly payments are $644. As gas prices rise, new and used S'V and truck prices fall, so the average trade-in price now is only $16,195. And after two years, you still owe $21,160 on the loan.
The Altima will set you back at least $20,000 (after a $1,000 rebate from Nissan), so you need to come up with a $5,000 loan payoff plus about $1,100 for taxes, title and tags to complete the transaction. If you roll all that into a 36-month loan with no money down, your monthly payment will increase to $769 a month (that's with Nissan's 3.9% financing). That's about $1,500 a year more than the Tahoe payments, but at $4.04 a gallon, the annual fuel cost of the Altima is $1,709 less than for the Tahoe. After weighing the value of each vehicle in three years and adding in the estimated cost of repairs once the Tahoe is off warranty, you'll be more than $2,000 ahead with the Altima.
What if. Trading in is more lucrative if your car loan is paid off. And if you buy an inexpensive urban warrior or a used car that is also fuel-efficient, you're likely to come out ahead pretty quickly. And this analysis assumes that gas prices will stay around $4 a gallon. If they go up, your cash flow and smugness factor will rise that much faster.