When Does It Make Sense to Buy a More Fuel Efficient Vehicle?

With gas prices creeping back up to $4.00 and beyond, I’ve been getting a lot of emails from readers asking whether or not they should trade in their current vehicle for a more fuel efficient one.

Unfortunately, the answer is never a simple one and requires a careful analysis.

As an example I’ll use this email that I received last week:

I have a paid for 2004 Eddie Bauer V8 Expedition with 123,000 miles and it runs great! I test drove a Ford Escape and Ford Focus today and was really impressed with the ride of the Focus. I have driven trucks and SUVs for 30 years; now I am a Grandma with a couple of grand kids at a time maybe once a month; don’t really need the SUV anymore. Is it better to drive my paid for Expedition or upgrade to something newer to save money on gas?

There is no doubt this person would save a tremendous amount of money on gas if she was to trade in the Expedition on a Focus. However, in order to save money in the long run she’ll also have to analyze these questions as well:

How much more will the new (newer) vehicle cost over her current car?
You’d have to drive a lot of miles to make up the difference of paying $15,000 to $20,000 above your old vehicle’s trade-in-value. Another important thing to consider is that your large gas guzzling vehicle is going to be worth substantially less in periods of high gas prices.

If financing the new car, how much additional interest expense will be involved?If you finance a $20,000 car at 5% interest, you’ll pay over $80 a month in interest for the first year alone (gradually decreasing each additional month).

How much more expensive will the new car be to maintain vs the old car?
Large American vehicles like the Expedition, Suburban, Tahoe, and Jeep Cherokee are relatively inexpensive to repair when compared to a more “fuel efficient” Volvo, BMW, Audi, or VW. You might save more in gas, but the costs of maintaining some makes and models of vehicles can be even more expensive.

How much more (or less) will the insurance rates be on the new car?
Downsizing from a large “family” SUV to a smaller two door coupe may cause your insurance premiums to sky rocket. Be sure to check with you insurance company prior to purchasing a new vehicle to make sure there are no surprises.

How much more excise tax (depending on state) will need to be paid for the newer more expensive vehicle:
If you live in a state with a high vehicle excise tax (like my home state of Maine), you’ll probably pay more per year for a newer vehicle than if you had kept your current car. As an example, In Maine you would pay an average excise tax of $180 per year for a 2006 Toyota 4 Runner. If you were to buy a brand new Toyota Camry Hybrid, you would pay over $650 the first year.

In many cases, people will use the gas efficiency angle to “justify” the purchase of a new vehicle, when in actuality, they’re actually paying a lot more money to get from point A to point B.

There is absolutely nothing wrong with trading in your current car for a more fuel efficient model, in fact it is quite admirable. However, if your trade is driven primarily by your desire to save money, make sure you honestly answer the questions above first.

You may also want to consider my tips for improving the fuel efficiency of your current vehicle.

Too Much Debt?  Download our free Trees Full of Money Debt Snowball Calculator and see how quickly you can pay off your debt.

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