WATCHING HELPLESSLY AS the price at the gas pump ticks into the triple digits is enough to make any SUV owner want to ditch their fuel-hungry behemoth for something a lot less wasteful. But before putting the “For Sale” sign in the windshield consider this: You could actually lose money by trading in your gas guzzler for a more fuel-efficient car.
“While it may 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,” says Jack Nerad, the executive market analyst for Kelley Blue Book, a provider of used and new vehicle information.
At first glance, a 2008 Ford (F) Escape Hybrid, which averages 32 miles a gallon, looks much more attractive than the 2006 Toyota 4Runner, which gets 17. Some quick math reveals that driving the Escape 1,000 miles at a current $4 a gallon would cost you just $125 in gas; the 4Runner, on the other hand, would need $235 worth — a $110 difference. Sure, it’s significant gas savings, but a few things are missing from the equation.
“It seems people are very focused on the immediate pain at the pump, but it’s important to think about how much it’s going to cost you all year and, if you make the change, how much will it save you,” explains Jeff Bartlett, the online deputy editor of autos for Consumer Reports.
To determine whether trading in your SUV for a more fuel-efficient car makes sense use our calculator, which takes into consideration such things as your driving habits, the trade-in value of your existing car and how much you still owe on it. Needless to say, many other factors come into play, including how long you’ve owned your car and additional ownership costs like insurance and sales tax. Here’s what SUV owners need to consider before they unload their gas guzzlers.
Length of ownership
As a rule of thumb, selling your car within the first three years of buying it is a mistake. “[In the first three years] depreciation is greatest, you’ve just paid tax, insurance is high, most people are still making payments on a loan… you don’t have much equity in your car because you’re paying more interest in those months,” says Consumer Reports’ Bartlett.
Sell your car when it’s only two or three years old and you’ll get just 50% to 60% of the original price, says Karl Brauer, editor-in-chief of Edmunds.com, an auto information web site. Hold off for another couple of years, however, and it will sell for 40% to 50% of its original price. “You’d get twice the use out of it and its only dropping that value a little bit more.”
Don’t rely on your SUV’s resale value to help offset the cost of a new car — it won’t be worth anywhere near the amount you’d typically expect.
In a May report entitled “Don’t Sell Your SUV,” Kelley Blue Book said that the value of the average SUV has depreciated by as much as $5,000 dollars, or roughly 8%, over the past six months. Ordinarily, that type of depreciation occurs over a 12- to 18-month period, says Nerad. Essentially, SUVs are losing value at more than double the regular rate, mainly because of skyrocketing gasoline prices.
As values plunge, many SUV owners are discovering that they owe far more for their car than it’s actually worth. In these cases, the loans are considered “underwater” or “upside down.”
“If you’re trying to get rid of a car that you can only get $13,000 for and you still owe $20,000 on it, you have a $7,000 deficit before you even buy a new vehicle,” explains Brauer.
Car owners in this situation often refinance their existing loans into the new ones. Their monthly payments not only include what they’re paying for the new car, but what they still owe on the old car as well — plus interest, says Nerad. (This is the assumption in our calculator).
Thanks to the credit crunch, many upside-down borrowers won’t qualify for a new car loan at all. “The banks have tightened up, [they are] not willing to loan the money to get people to buy all of these cars,” says Marvin Hedrick, director of finance at a Chrysler dealership in Spring Hill, Fla. “Negative equity complicates it much, much more.”
SUV owners who are looking to sell will need plenty of patience. A survey by CNW Marketing Research found that, in April, the average SUV took more than 66 days to sell and, when it did, it sold for 20% less than its Kelley Blue Book value.
Some dealerships aren’t even taking SUVs and trucks right now, says Brauer. “It’s an extreme example, but that’s certainly the mindset. [SUVs] are public enemy No. 1,” he says.
There is a silver lining for those willing to wait. Kelley’s Nerad predicts that prices for SUVs will bottom out soon, and demand will pick up as drivers face the oncoming winter. In the meantime, Lisa Featherngill, the director of financial and estate planning for Winston-Salem, N.C.-based wealth management firm Calibre, suggests that SUV owners hang onto their gas guzzler and buy an inexpensive fuel-efficient car they can use for their daily commute. Then, when it comes time to go to Costco or take the family on a road trip, they can fire up the SUV.
Don’t forget to consider all the extra charges that come along with buying a new car. Sales tax, for example, can run as high as 5% in some states, says Featherngill. Buy a $20,000 car and the sales tax could easily cost you another $1,000.
You’ll also have to register the car with the DMV — for a fee. And depending on the car, you might have to pay more for insurance, too.