A nationwide sell-off of gas guzzlers is under way. Those big, low-mileage SUVs and trucks don’t seem so appealing when a fill-up sets you back $60 or more.
Many people have already sold their gas hogs in order to downsize. Many others would like to, if they could only find a buyer.
Michelle Strom of Puyallup, Wash., is stuck with a 2004 Suburban she’s tried to sell for months. Strom started at the Blue Book value of $24,900 and got no response. A few weeks ago she dropped the price to $19,999, and still no action. “It’s frustrating,” she says. For now, the Suburban remains parked at her mother-in-law’s house.
A quick check of AutoTrader.com shows a marketplace flooded with big vehicles. This weekend, I searched for an SUV or truck within 25 miles of Silver Spring, Md. There were more than 9,100 listings and many of them were for 2007 and 2008 models with extremely low mileage.
Consumer advocates are urging anxious car owners to slow down and do the math before they race to get rid of that larger vehicle.
“People need to think very carefully before they dump their gas guzzlers,” advises Jack Gillis, author of "The Car Book." “It doesn’t make economic sense if you take a loss on the transaction.”
Many people who want to sell a late-model vehicle are still making car payments. Even after the trade-in allowance, they might have to pay thousands of dollars to get out of the loan on their current vehicle in order to purchase the new one.
That’s what happened to my friend Bill Ogden, a radio traffic reporter in Seattle. Fed up with the high cost of gassing-up, he traded-in his Nissan Xterra and bought the smaller Nissan Sentra. At the end of the deal Ogden still owed about $5,000 on the Xterra. He had to roll that debt into the loan he took out to buy the Sentra. “I took a bath,” he says. You can buy a lot of gas with $5,000.
Crunching the numbers
After crunching all the numbers, Consumer Reports concludes it rarely pays to downsize if you’ve only owned the vehicle for three years or less. “There are some significant costs associated with trading in too soon,” says Jeff Bartlett, deputy editor for consumerreports.org.
The typical consumer has a five-year auto loan. Bartlett says depreciation is nearly half the cost of ownership for those five years. If you trade in midway through that loan, you have very little equity in the vehicle. “You’re not going to have as much to trade in as you might think,” he explains.
Consumer Reports analysis shows that for the typical owner with a five-year loan, the amount you could save in fuel costs by trading in at three years — even if the new car delivers a big jump in miles per gallon — is significantly less what you’d save in depreciation if you kept the vehicle another two years. After five years, the editors say, switching to a smaller car makes more economic sense.
The editors add this caveat to their analysis: “With fuel prices in constant flux and depreciation potentially increasing on some vehicles, clearly this is a moving target.” But in the end, they say, “it’s less expensive to tough it out another year or two with a gas guzzler than to trade in too early.”
Other things to consider
There is a glut of used SUVs and trucks for sale, so your trade-in today is worth less than it was just a few months ago.
“Dealers want to sell cars whenever possible, but they won’t offer full Blue Book value at this time,” says Crystal Jack, spokesperson for the California New Car Dealers Association. “They’re being more cautious about accepting larger vehicles for trade-in.”
A dealer in Seattle (who did not want his named used) gave me this pricing information. About six months ago, a 2006 Ford Expedition sold at auction for about $26,000. Today, it goes for about $16,000. That’s why you won’t get even close to book value if you try to trade-in a big vehicle.
The bottom line
Burning less fuel is good for your budget and the planet. With so much disposable income lost to each fill-up, it’s easy to focus on fuel economy and forget about the total transaction.
Downsizing is something that should be based on the numbers and not emotion. You might find out that it makes more economic sense to keep your low-mileage car and feel the pain at the pump each fill-up, rather than absorb a huge loss by selling an unpopular vehicle.
Think it through and make sure the time is right for you. Otherwise, you could make your financial situation worse than it is.
There is one additional option you should consider. If there’s more than one vehicle in the family, you might want to swap cars. The most fuel-efficient one goes to the person who drives the farthest. Several people at my office have already done this and it makes a difference.
By the way, if you need a large and roomy vehicle, there has never been a better time to buy. The selection is huge, prices are low, and dealers are willing to negotiate. And because of early trade-ins, many are new models with very low mileage.