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May 23, 2021

Downsizing: Choosing a used car to save gas and money

The meteoric rise in gasoline prices may have peaked, at least for now. But many shell-shocked consumers expect the pain at the pump to be a chronic condition, according to US Today.

One obvious solution is to cut your losses and buy something smaller to ease the recurring pain at the pump, particularly as the price of those gas guzzlers is likely coming down.  

"On average, prices of fuel-inefficient used cars fall a lot and those of fuel-efficient used cars rise a lot when gasoline prices increase … So if you drive a lot be aware. But if you drive a little, you should buy a used fuel-inefficient vehicle when the gas price goes up."

This is the advice of Florian Zettelmeyer, a professor at Northwestern's Kellogg School of Management whose newly published research indicates that you’ll save significantly on the selling price of the gas guzzler; but because you'll drive the car only rarely, the extra cost of gasoline will have only a minor effect on your purse.

After crunching the numbers on various real-world scenarios in previous blog posts, the folks at Consumer Reports aren’t so sure.  

Downsizing now could reduce your out-of-pocket costs in the short term, but over the long haul, you could lose more on the new car’s depreciation than you’re saving in gas, CR warns.  

The longer you own a car, the more years you have to amortize the initial purchase, and the cheaper it will be to own. So if your old car is still running well, in the long run you’re usually better off hanging onto the old beast even if it does guzzle fuel.

Even a five-year-old car with a loan that’s paid off could be costing you more in fuel and other operating costs than you’d spend on some smaller brand-new cars over the next three years.

Buying another new car within a few short years and taking a loss on its depreciation too, could usurp any savings. Unless you choose carefully, the cost to buy a newer model (measured in thousands of dollars) can overwhelm the savings at the pump (counted in the hundreds of dollars).

Assuming you’re not cutting out driving altogether, what’s your plan to fight the rising cost of fuel?

By Gordon Powers, MSN Money

* Follow Gordon on Twitter here.



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...