By STEVE BUCCI
bankrate.com
05-SEP-05
Dear Steve,
I'm concerned about the rising cost of gas. In the long term, is it worth it for me to trade in my SUV for a smaller, fuel-efficient vehicle, even if I'm upside down on the loan for my SUV?
_ Will
Dear Will,
For those of you who don't know what an upside-down loan is, it is a loan on which you owe more than the asset is worth. This is not a good place to be if you can help it. Read on to see why!
First, why are you upside down at all? That was a silly thing to do, and now you want me to tell you that you can do it again? Sorry, Will, no can do. If you're upside down now, and you buy a new buggy, you will most likely be more upside down. Regardless of the cost of gas, this idea is not a good one.
If you want to get out from under, I suggest that you make some extra payments to get right-side up first. You can use the money you are going to make from the second job you should be getting. The leftover income should pay for the extra gas consumption as well. Use Bankrate's auto loan calculator, which includes an amortization table, to see how your loan balance will fall over time; compute your loan's principal, and compare your balance against the value of your car on a site such as www.autobytel.com. When your car is worth more than your loan's principal, you will be right-side up again.
Once you reach that point, here's the calculation you should make. Let's say you drive 16,000 miles a year and get 16 miles per gallon, just to keep my math simple. In your current situation you'd use 1,000 gallons of gas a year. All things being equal, if you switch to a fuel-efficient car and double your mileage to 32 miles per gallon you will save 500 gallons of gas at, say, $3 a gallon or $1,500 a year.
So, the math says you are paying $3,000 a year now and may be looking at more soon. With a new fuel-efficient car you may be paying $1,500 a year for fuel. So the difference is $1,500 a year in gas costs. There are other costs, however, that you need to keep in mind. Will your auto payment go up or down with a new loan? How about your insurance and taxes? If the combination of new expenses is more than the savings, then you will be worse off. You do the math.
Perhaps just driving less will save you more in end. I know it's written in the Constitution that we can all drive as much as we want, but these are trying times and maybe this time-honored practice of one person per car may be ready to give way to more neighborly ride-sharing. If you can trim a miserly 1,000 miles off your annual mileage of 16,000, you'll save around $3,000, which is twice what you'd save in gas by trading in the old sport utility vehicle for a fuel-efficient car.
So while buying a new, smaller car may save you $1,500 a year, the costs of sales tax, property tax and insurance may eat that up. Driving less will save you $3,000 a year with no increase in tax or insurance. Strictly from the math end, I'd just stay home more and practice my cooking skills.
Whatever your decision, I wish you good luck!
(Steve Bucci is president of CCCS Credit Advisors. Visit www.creditcounseling.org or call 877-311-2227 for additional debt advice. The Debt Adviser is a weekly feature of bankrate.com. Distributed by Scripps Howard News Service.)
