When to Downsize Your Car

Consumer Reports has an article on MSN titled : When to Downsize Your Car. A little while back I discussed fuel efficient used cars and I know a lot of Americans are probably thinking of trading in their gas guzzler for something with a bit better fuel economy. Better MPG is going to save you money of course but you should also consider other potential costs before you run out and trade in your car. The Consumer Reports article looks at it from the perspective of those that still owe towards their car loan and whether or not it makes sense to trade in a car before its paid off. They say:

So, according to CR's analysis, the amount a typical, payment-making owner could save in fuel costs by trading in early at three years, even with a big jump in miles per gallon, is significantly less than the amount the person will save in depreciation by keeping the vehicle another two years. After five years, trading in for a smaller car makes more economic sense.

This makes sense to me, basically in general you want to avoid trading in your car too frequently. Because the depreciation and interest are higher at the start of your purchase, if you trade in too often you eat too much in depreciation and interest costs. If you bought a new car with a loan and traded it in for another new car every 2 years you'd be blowing a lot of money on interest and depreciation. For the same reason you don't want to trade in a newer car for a more fuel efficient model too soon.