With Gas Prices Low, Now’s the Time to Buy a Small, Not Big, Car

Auto Loans, Loans
When Shopping for a Vehicle, It Pays to Think Small

With gas prices relatively low, you might be tempted to buy that SUV you’ve always wanted. But thanks to falling prices, high cash rebates, and other incentives, small cars are going for short money — and they’ll still give you great utility while saving you money on gas, maintenance and insurance.

Compact car prices have fallen significantly along with pump prices, data from Edmunds.com shows. It’s a cycle we’ve seen before: As fear of gasoline price spikes fades, consumers flock to larger vehicles, and small cars sit on dealership lots. Sometimes those small cars sit around for as long as 100 days, compared with the 60 days that’s been typical in recent years. Eventually, manufacturers throttle back production and offer incentives — low-interest financing and cash rebates — to spark sales.

But if you shop against the consumer trend and buy a small car, you can greatly reduce your ownership costs. “The average quality across this segment has never been higher — there are no dogs here,” says Karl Brauer, senior director of insights for Kelley Blue Book.

Shop smart, save more

If you’re a smart shopper and take advantage of dealer discounts and manufacturer rebates, you can save an average of $1,000 on a small car, says TrueCar.com’s industry insights analyst, Patrick Min. Data show that compact prices have dropped an average of $500 from a peak in 2013 as incentives have climbed, bringing the average sale price to just under $20,000. With rock-bottom interest rates and $2,000 down, your monthly payment could be less than $300 a month on a five-year loan, NerdWallet’s auto loan calculator shows.

Still, it appears many buyers are heading in the opposite direction, shopping for trucks and large SUVs even as those prices have shot up. In early 2014, the selling price of a large SUV was $48,155. By the end of 2015 it skyrocketed more than $8,000 to $56,249, according to Edmunds data.

Automakers are watching sales carefully and “dialing back the inventories of small cars,” says Ivan Drury, senior analyst at Edmunds. On the other hand, the sale of large trucks and SUVs is exploding. “Consumers are just crazed now, but in a year or two they might regret it” if gas prices spike again, he says.

Saving at the pump isn’t the only factor to consider when choosing the right vehicle for you. Look at the total cost of ownership, which includes insurance, maintenance, repairs and — one of the biggest factors — depreciation. Over the life of the car, these expenses can strain a budget more than you might expect.

If you’re still not convinced, read on. We’ve got a bunch of reasons to walk past those rows of SUVs at the dealership.

The benefits of small cars

Small cars offer a number of benefits over a large SUV or truck:

  • Savings on gas. Gas prices are volatile and, even at low pump prices, fuel costs add up. According to FuelEconomy.gov, the average yearly cost of gas for a 2016 Chevrolet Tahoe is $1,450, compared with $750 for a Honda Civic. “The American consumer seems to have a very short memory when it comes to the pain of filling up a 30-gallon gas tank at $4.50 a gallon,” says TrueCar’s Min.
  • Savings on yearly costs. The second-year costs of an SUV (such as registration, insurance, maintenance, and the drop in your vehicle’s value because of its age and condition, known as depreciation) total $9,000 compared with $6,000 for a compact car of the same age, according to Edmunds.
  • Ease of driving and parking. A compact’s smaller footprint makes navigating congested streets and tight parking spaces easier in increasingly crowded cities.
  • Lower emissions. Tailpipe emissions are relative to engine size — a smaller engine means less carbon dioxide and other greenhouse gas emissions. Check emissions on FuelEconomy.gov.

A compact car is perfect for a family’s run-around-town car, or a good first car for a recent college grad. Advances in technology have made small cars much safer and should assuage some concerns about their safety. Side-impact air bags and radar-based lane-departure warning and collision avoidance systems are finding their way into compact cars at an affordable price. Check crash test scores for more information.

7 tips when buying a small car

Even though small-car prices are low, it doesn’t mean the buying experience will be a breeze. It’s always important to be prepared for the purchasing process. Here are shopping tips particularly suited for the small-car market:

  1. Consider your needs, not your wants. Be realistic about how much cargo capacity you need. There’s more room inside compact cars than ever before, no matter how small they look from the outside, Brauer says. If you have particular needs, such as toting a bike, look at a compact hatchback, such as the Civic hatchback, coming later this year.
  2. Build a list of target cars. The market is broad and changing all the time. Make a list of cars you want to target. As TrueCar’s Min says, several compacts are due for a redesign, meaning the outgoing models will have more incentives and deeper discounts. Just remember that high incentives will decrease the residual value accordingly. Since you paid less for the car, its depreciation starts from a lower point, meaning that the resale value will drop more quickly.
  3. Do back-to-back test drives. Call a dealership’s Internet manager and schedule test drives for all of your target cars. Drive them back-to-back so your impressions are fresh.
  4. Check car pricing and incentives. Use pricing guides such as Edmunds, Kelley and TrueCar to find what cars are actually selling for. Make sure to check incentives, often listed on the carmaker’s site. Deduct rebates from your lowest negotiated price.
  5. Avoid negotiating in person. You have more leverage if you contact a dealership via email, via text or by calling the Internet manager. If you get a good offer, ask the dealer to email you an “out the door” price that includes a breakdown of fees.
  6. Get pre-qualified for a loan. If you need a car loan, get pre-qualified before you hit the dealership. Whether you have good, fair or bad credit, there are a lot of advantages of getting approved for a car loan before you begin shopping. You may get a better interest rate and other terms on the loan, for instance, and you’ll improve your negotiating position by turning yourself into a cash buyer from the dealership’s point of view.
  7. Beware of upsells. Some dealerships will deliver the car to you, along with the sales contract, if you ask. But if you close the deal at the car lot, be ready for the finance manager to try to upsell you. Popular pitches are the factory warranty, paint protection and additional alarm systems.

Even though SUVs are hot now, the benefits of a smaller car are tough to ignore. Next time gas prices spike, you might be glad you shopped against the trend.

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Phil Reed is a staff writer at NerdWallet, a personal finance website. Email: preed@nerdwallet.com.


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