Many consumers are facing a looming question in this time of high gas prices: Whether to downsize from a big (often gas guzzling vehicle) to a small car.  Many wonder whether this large initial investment is worth the money saved on fuel.  With the national average gasoline price hovering in the high 3 Dollar range, many consumers are going ahead and trading in their larger vehicles for smaller models with better fuel economy.   At first glance, this seems like a worthwhile move, as you will get instant savings at the pump, and the pleasure of burning less fossil fuel.  Yet, it is very important to view the whole picture, as making the switch too soon could cost you more in overall costs than you'll save at the pump. 

There are many factors that come into play when determining if it is best to downsize right away.  Often times, if you've only owned your vehicle for three years, it is best to keep driving what you’ve got, especially if you still owe on a vehicle loan.  If you trade in part way through your loan period, you may have less equity, or trade-in value, in the model than expected — limiting the potential down payment on the new vehicle.

Another point to consider is the vehicles depreciation, the value a vehicle loses over time.  If you've owned your car for four or more years, that initial depreciation is spread over a longer period.   On the other hand, with a new vehicle, you will lose out on depreciation.   Basically, what a payment-making owner could save in fuel costs by trading in early at three years, even with a big difference 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 of ownership, trading in for a smaller car makes more economic sense.

With fuel prices through the roof, it is easy to get rid of a gas guzzler as soon as possible.  The initial thought may seem like, with such a savings in fuel, this is the best thing to do.  Sometimes it is, but always take a moment to figure in all of the factors: fuel costs, insurance costs, interest on financing, sales tax, and depreciation values.  In the past year, Prius sales have jumped through the roof, as consumers are looking for the ultimate low mileage vehicle.  So, even if downsizing doesn’t necessarily payoff financially, it always pays off in the long run – at least to the earth and the air we breathe.