editor's note: this article was written in 1998. The prices have become outdated, but the concepts are still valid.
Just what is an "Economy Car?"
Ask six friends what the term "economy car" means and you'll hear mostly about gas mileage. Well, an economy car, by definition, should be economical, right? And "economical" means that it will cost less to own and operate. Well, in many cases, "economical" doesn't have anything to do with gas mileage!
As you'll soon see, the difference in gas mileage from one car to another is almost never a good reason to change cars. Certainly, if you are about to replace your present car anyway, and fuel economy is a factor, you would be wise to pay attention to the miles per gallon figures of your prospective purchase. But buying a more expensive car simply because of its better mileage requires some careful arithmetic to make an intelligent choice.
Denise now drives a cushy, eight-year-old, air-conditioned Maxicruiser with power just-about-everything. She paid it off years ago. It shows 87,000 miles on the odometer and is still in better-than-average condition. It gets about 14 mpg in town and 20 on the highway. She just got a new job and her Maxi was the only big car in the company parking lot. Everybody else got with the program and bought one of those new, egg-shaped mini-cars, and now, Denise feels the need for a new car, too. In her quest for reasons to replace the Maxicruiser, Denise felt a mini-car would give her "better economy."
After several trips to various new- and used-car dealers, she finally decided on a three-year-old Minicar. The new car was equipped with a five-speed transmission, a nice stereo and air conditioning. It showed 30,000 miles on the odometer. It cost $6995, which she skillfully negotiated down to $6000. The dealer allowed her a trade-in value of $1000 for her Maxicruiser against the purchase price of the Minicar. She was also sold an "extended warranty" for another $400. After subtracting the value of her trade-in as her down payment, she signed a 36-month contract for a balance of a little more than $5400, (financed at 11 percent, that's $180 a month), drove her new car home, and proudly parked it in the driveway. She now had a car just like everyone else's on the block.
Denise wasn't happy to find that her insurance premium had nearly doubled because of the new car. Her agent explained that she had carried no collision on the old Maxicruiser, but since she was financing the new car, the lender insisted she now carry collision. And as expensive as the newer cars were to repair (even a light tap on the front bumper of that Minicar could do more than $1300 damage, she was told), it just wasn't bright to drive without collision coverage, even if it wasn't required. Denise understood, but the extra $220 hurt just the same. Because most of her driving was the commute to work--nearly all highway driving--the Minicar was getting about 33 mpg. Maybe she could make her payments out of what she saved on gas, as the salesman had promised.
The Numbers Tell it All
OK, let's do the math. Denise drives about 15,000 miles per year. The Maxicruiser averaged 17mpg. 15,000 miles at 17 mpg comes to 882 gallons of fuel. At $1.50 a gallon, that's about $1300. The Minicar uses 500 gallons annually at its average of 30 mpg. That comes to $750 for a year's supply of gas. So far, Denise shows a savings of $550/year. The added $220 for insurance coverage not needed for the old car drops her savings to about $330/year, or $27.50 a month. Hardly a car payment, right?
OK, so far she's saving $330 a year, or 27.50 a month. So for driving a car half the size, half the comfort, and a fraction of the safety compared with the sturdy old Maxicruiser, Denise pays about $150 a month more (the $180 payments less the $27.50 savings) to drive the Minicar. Keep track of this figure for a few moments; we'll get back to it. Figuring only principal, interest and the down payment, she will have spent a total of $7480 over the life of the contract. The added insurance cost brings it up another $660, to $8140. But will she be able to live with her basic Minicar for longer than three years? Won't there be sufficient reasons by then to justify another new car? In another three years, she'll have a six-year-old Minicar . . . with 75,000 miles on it . . .
Three Years Later . . .
Let's take a look at the two hypothetical cars after three years. Had Denise kept the Maxicruiser, it would now be showing about 132,000 miles. If she had serviced the car properly during those miles, chances are good that she would have had no major problems. The Minicar would now be reading 75,000 miles. It, too, would probably not have needed any major repairs. The Maxi was worth $1000 three years ago. If it still looks and drives well, it's still worth at least $500. The Mini was worth $6000 three years ago when Denise bought it. At six years and 75,000 miles, it has a market value of about $2000. That's $3500 more depreciation on the Minicar, compared with the Maxi! Add that very real $4000 cost to the $8140 and now Denise has spent a whopping $11,640 over three years on her mini-car. This is economy?!
All of this might sound like I'm recommending never buying another car as long as the old one is still running. Not at all! The lesson in this example is that it's important to consider all of the costs of changing cars, and that depreciation is an important--if not one of the most important--costs to keep in focus. Most cars suffer a huge depreciation loss the first year, and some big losses in the following few years. A ten-year-old car has depreciated to near the bottom of what it will ever be worth as long as it's still in good condition. If you're after maximum miles per dollar, let somebody else pay all that depreciation!
OK, Let's Recap.
If Denise could really afford to spend all that money over the course of three years, then there was certainly nothing wrong with her purchase. But if there were other priorities in her life that got put on hold for this purchase, like maybe a down payment on a house, a course she needed to complete to get a sizable raise, braces for her daughter, or even a lengthy vacation in the tropics, then she unnecessarily deprived herself of things much more important than having a car that blended in better at the office parking lot.
What is key here is making these decisions consciously. And that's often difficult to do in the glittery atmosphere of a car showroom! When money counts, it's essential to look at all of the costs involved, not just gas mileage!
One more "if": If Denise had opted for a new car instead of a three-year-old one, her expenses could have been thousands of dollars higher.
In addition to doing your math when deciding what is and what isn't an "economy car," it's also important to decide whether to even buy the newer car in the first place. Of course, this presumes that you're really, truly seeking economy!
This article is excerpted in part from "The Intelligent Woman's (Used) Car Book" available for $14.95 from Oregon Wordworks, Portland Oregon, or through their website: MailBooks.com.
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