 Upside
down in a gas-guzzler
|  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. In addition, hybrids enjoy special
tax breaks, so that's on the plus side of the ledger, too.
Under this scenario, 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:
- Hybrids are more expensive than comparable gasoline-only
vehicles. Will your auto payment go up or down with a new loan?
- These cars also may depreciate faster than most,
as hybrid technology develops. If an even more-efficient model
is available when you sell, fewer people will want to buy your
used hybrid.
- Depending on the age and make of your SUV, the
insurance for your new hybrid may be more than what you're paying
now.
My point is you should add up all the costs and
benefits on both sides of the ledger, and not be seduced solely
by the gas savings. If the total savings are greater than the
total other costs, then you might consider going for a more
fuel-efficient vehicle. Make sure, though, that you are right-side
up in your current loan before making a trade-in, and you have
a sufficient down payment to stay right-side up in your new
loan before making the purchase.
You have another choice: Drive less. You could
save the same amount by driving half as much. Strictly from
the math end, I'd just stay home more and practice my cooking
skills.
Whatever your decision, I wish you good luck!
The
Debt Adviser, Steve Bucci, is the president of Money Management International
Financial Education Foundation. Visit MMI
for additional debt
advice or click here
to ask a debt question. |
