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Rising Gas Prices: Trade in the gas guzzler?

With gas prices topping $3.00 a gallon in most parts of the US, it got me thinking about an article I wrote back in 2008. This was the beginning of the recession, and gas prices had shot up to about $4.00 a gallon. The value of SUVs was plummeting, and people were scrambling to trade them in for more fuel efficient cars. How did consumers weigh the costs?

(Keep in mind that this was written in the summer of 2008, and some information may not be current)

Rising gas prices are driving consumers to curb their SUV’s and take the wheel of more fuel-efficient cars, but is this the right move?  Many people think only about their immediate cost at the pump, and forget about the long-term effects.  Trade-in value, driving habits, how much is owed on a car loan; these should all be considered before deciding to sell a used SUV.

The first tip is not to sell a car after less than 3 years of driving it.  This is the time when a vehicle depreciates the most, losing 40 – 50% of its original value.  A car can be used for a few more years, and still retain nearly as much value.  SUVs in particular are quickly depreciating in value (8% in the last 6 months on average).  Still, trading in the gas-guzzler may not save money.  The gas may still be expensive, but it’s better in the long-run to get the most value out of the vehicle while being able to drive it for twice as long.  It’s also important to know that the savings may not be immediate.  For most, trading an SUV for a compact will cost more right now, but balance out years later.

Here is an example: A consumer trades in a four-year old GMC Yukon, worth $17,314, for a new $24,076 Toyota Prius. The difference is $6,712. If the consumer drives 1,200 miles per month and gas costs $3.74 per gallon (national average), the monthly fuel savings will be $249.74. At this rate it will take 27 months to pay back the additional cost of the Prius over the trade-in value of the Yukon, and start saving money from the lower fuel price.

Buying a small, fuel-efficient car is an excellent way to combat rising gas prices, but the sticker price is what dents your wallet.  The average price of a compact car has increased by $2,532 since 2004.  That’s nearly double the average price increase of all other cars.  Right now is the worst time to sell an SUV, and also the worst time to purchase a compact car.  Every situation is different and it may take some time to see the savings, but consumers must weigh all of the factors and compare all of the costs before making a change.

ABOUT AUTHOR / Andi

Andi is a Marketing Assistant at ACCC. He is passionate about supporting financial literacy efforts and helping to educate people on the Talking Cents blog!

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