Consumers, Cars and Debt Management
October 20, 2008
US consumers shifted away from vehicle purchases in July 2008, turning credit cards into the driving force for consumer credit expansion. Credit card debt grew by $4.6 billion, or 2.5%, at the expense of non-revolving debt like car loans. Non-revolving debt grew by $678 million or just 0.5%.
According to a recent survey on AutoTrader.com, one strategy consumers are considering is “downsizing” their current vehicles. Forty-four percent of survey respondents said they were considering buying a more fuel-efficient vehicle to save money on gas. Only 25% of respondents said they were considering downsizing their vehicles to decrease their payments.
Downsizing a vehicle makes sense if you want to save money, but most consumers aren’t thinking about the potential savings correctly. If you have a $400 monthly car payment on a car that gets 18 mpg, and travel an average of 30 miles per day, you can expect to spend $1,733 on gasoline, assuming that you make your commute five times per week and gas prices hold steady at $4 per gallon.
If you downsize your vehicle to a car that gets 25 mpg, but don’t reduce the car payment, if all other conditions stay the same, you can expect to spend $1,248 on gasoline, and realize a savings of $485 per year.
On the other hand, if you downsize to get a lower car payment, and knock $100 off your payment per month, you’ll realize a savings of $1,200 per year, nearly 2.5 times as much as the savings realized by switching to a more fuel efficient car. If your downsizing accomplishes both an increase in fuel economy of 25-30 percent and a reduction in your car payment of 25 percent or more, you can realize a savings of about $140 per month.
In most cases, you’ll realize better monthly savings by reducing your car payment than you will by reducing your gasoline consumption. To optimize your savings, you should consider doing both. As an added bonus, consult your insurance agent about the rates on used vehicles. You may find that your more fuel-efficient, less-expensive car is also less expensive to insure.
