Fuel-Efficient Or Financially Prudent

By Michelle Singletary
Sunday, May 25, 2008

Watching television recently, I was amused by a motorist who said that all he could do about soaring gas prices was to close his eyes and pump.

There are some things you actually can do to reduce your costs -- and fuel consumption -- such as driving slower and taking the junk out of your trunk. But Consumer Reports has released a warning about one gas-saving tactic that might end up costing you more money.

If you're thinking of trading in your gas-guzzling vehicle for a more fuel-efficient ride, do the math -- because the savings you're hoping for at the pump might be negated by the price you pay to replace your car.

The high cost of gas is changing the way some people are shopping for a car, according to a survey of Michigan AAA members. Gas mileage was ranked as the No. 1 criterion that auto club AAA members said they would use in deciding their next car purchase. Next came make and model, safety features, performance, seating capacity and technology features.

I understand that paying upward of $4 a gallon is making your heart pump faster, but that pales in comparison to the several thousand dollars you may have to shell out for another car.

"While we support the downsizing trend in principle, we caution consumers to look at their long-term owner costs and not rush to make a change they may later regret," said Jeff Bartlett, deputy auto editor at ConsumerReports.org.

Here's the problem -- at least in the short-term -- with trading in your car for one that's more fuel-efficient. You have to take into consideration several factors, including depreciation and finance charges.

Let's start with depreciation, or the value your car loses over time. If you've had your car for only a few years -- three or less -- it's not worth the savings in gas to trade it in because you take a big hit on its declining value, Bartlett said.

Depreciation makes up about 48 percent of an average owner's total vehicle costs in the first five years of ownership, according to Consumer Reports. Fuel cost averages about 21 percent of your vehicle ownership.

And then there's the finance charge. If you're two or three years into your current loan, you would be trading up to several more years of car payments, plus interest.

Let's look at an example laid out by Consumer Reports. Suppose you have a 2005 Ford Five Hundred SEL V6 sedan that gets 21 miles per gallon. You want to trade it in for a 2008 Toyota Prius hybrid, which gets 44 miles per gallon. The per gallon mileage figures are based on Consumer Reports' fuel-economy test results.

Let's assume you drive about 12,000 miles every year. At $3.75 per gallon (and, of course, this national average might change by the time you read this), you'll pay about $2,000 in gas this year driving the Ford, according to Consumer Reports estimates when it did these calculations. If you owned the Toyota, your fuel bill for the year would be about $1,000.

That $83 a month in savings looks darn good right now.

But wait, says Bartlett. When you calculate the total cost of ownership (depreciation, finance charges for a 60-month loan, insurance, maintenance, sales tax and fuel costs), the Toyota will cost about $9,000 to own for the first 12 months, while the Ford costs $6,000 during the same period. That's a difference of $3,000.

Other examples of what it might cost you to downsize to another vehicle are available at http://www.consumerreports.org. Look for the link on the home page under "Today's News."

Of course, the total cost of ownership can rise if the interest you pay or your insurance costs are higher than the national averages used by Consumer Reports. If you pay cash for the car, have a shorter loan term, or live in a state without sales taxes, your annual cost of ownership could be lower. On the other hand, holding onto a less desirable vehicle that gets terrible gas mileage could mean its depreciation accelerates. If gas prices hit $5 a gallon, you will have a tough time trading in the car, Consumer Reports warns.

Nonetheless, Bartlett says, it might be better to tough out the higher prices for now rather than trading in your car just to save on your fuel costs.

"There has understandably been a fixation on the price of gas. But rather than act on the basis of emotion, we want people to think this through," he said. "We just want to make sure people aren't making a situation worse than it needs to be."

ConsumerReports.org has recently launched a "Guide to Driving Green" special section ( http://ConsumerReports.org/fuel) with tips on how to improve fuel economy, lists of models with the best fuel economy and guides to the latest hybrids and alternative-fuel vehicles.

Definitely check out the tips from Consumer Reports, and if all else fails in easing the pain at the gas station, you may have to just close your eyes and pump. And don't print out the receipt.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.