With fuel prices at an all time high, motorists are trading in their giant gas-guzzlers for smaller, more efficient cars.  And although this makes sense, if you switch out cars too soon you could end up paying more costs overall than you’ll save on fuel.  Consumer Reports claims that it is beneficial to downsize if you time it correctly.

A Consumer Reports study shows that if you haven’t paid off your car loan yet, it may not be to your benefit to downsize after only three years.  A car loan is made up of a large percentage of interest initially, so, if you trade in your vehicle too early you will end up with less equity, which will give you less for a down payment on a new vehicle.

Another thing that has a big affect on your car equity is depreciation.  For the first five year of owning a car, depreciation is approximately 48% of overall vehicle costs for the owner.  And on average, fuel costs are only equal to around 21%.  Depreciation is the greatest in the first three years, and after that it starts to level off.

So if you trade in a car three years old, you will start over with a whole other depreciation ride.  However, it makes sense to trade in your vehicle if you have owned it for more than four years.  But, whenever you keep a vehicle for a long amount of time you should purchase used car warranties for peace of mind.