Buying a car with a big discount doesn't always save you money. With rising gas prices and depreciation, your new car could cost you more in the long run.
Consumer Reports Auto Price Service (APS) reviewed the sales programs that will be available through the high-volume July 4th sales weekend to identify the models with the greatest incentives and determine whether those discounts add up to a good deal over a five-year ownership period. The results were mixed, with most models proving to be more expensive over the long haul than other, CR-recommended alternatives. However, there were a couple of large SUVs and a sedan that proved to be reasonable choices: the Chevrolet Tahoe, GMC Yukon, and Mercury Grand Marquis.
INCENTIVES CAN DISTRACT FROM SMART BUYS
There is a wide range of sales incentives being offered this summer, from gimmicky gas cards to traditional low-rate financing. For our analysis, we looked past such things as the heavily promoted discount gasoline enticements, since their benefits are limited to just one year and often available in only specific regions. We instead focused on the offerings that promised the most significant discounts to the purchase price.
The 10 largest July 4th-period incentives are offered on large, American-brand vehicles from Ford Motor Co. and General Motors. Incentives are usually used to boost sales on low-demand models. Large vehicles with heavy incentives, therefore, are not surprising considering the overall market move toward fuel-efficient vehicles.
A recent Consumer Reports study showed that elevated gas prices were having a significant impact on the American lifestyle, with 37 percent of the nationwide survey respondents reporting that they were considering replacing their current vehicle for one with greater fuel economy. Current sales trends support the study findings, with four-cylinder vehicle transactions on the rise while large, V8-powered vehicles are on the decline. (Compare the most fuel-efficient vehicles on the market today with the Consumer Reports New Car Buying Kit.
With elevated fuel costs being top of mind for car buyers, we wanted to go beyond itemizing available incentives to sharing insight on how purchasing a discounted, less-efficient vehicle could impact vehicle costs over a traditional ownership period. Further, it was important to consider the other critical cost component: depreciation. While all models depreciate right from the day of purchase, large, gas-guzzling models will likely lose value more rapidly than the thrifty models gaining popularity.
After all, large vehicles are discounted because they are less desirable today, and if fuel prices continue to rise, they may be even less so tomorrow. In the end, the analysis would show if incentives can offset certain operating and ownership costs that could justify the purchase of a large vehicle in today's market.
HOW WE DID THE ANALYSIS
To create the financial model needed for this analysis, Consumer Reports APS needed to determine the likely purchase price for each vehicle and project how these vehicles will depreciate over time.
To come up with transaction prices, APS first calculated a Consumer Reports Bottom Line Price for each vehicle. This figure, which is included with every CR New Car Price Report, is calculated by subtracting any sales incentives, dealer holdbacks, and rebates from the dealer-invoice price. This provides a good starting point to begin negotiating. Typically, a reasonable purchase price would be about 4 to 8 percent over the CR Bottom Line Price. For this analysis, we used the CR Bottom Line Price plus 4 percent, though there is potential for deep-discounted models to sell for closer to 2 percent over the CR Bottom Line Price.
Fuel costs were based on CR's overall fuel-economy results, or calculated estimates for models not tested, and annual driving of 15,000 miles a year with gasoline at $2.90 a gallon. (Fuel economy Ratings are available to ConsumerReports.org subscribers.)
To help put these deals in perspective, we also analyzed three CR-recommended alternatives. Our picks were based on offering most of the intended functionality in a more fuel-efficient vehicle that has excelled in our performance and Reliability Ratings (available to ConsumerReports.org subscribers.
Slightly smaller than the heavily incentivized group, the three-row Honda Pilot and Toyota RAV4, and the luxurious Acura TL are considered smart choices. Not one of the three selections had incentives applied, and this analysis would reveal if these good vehicles also stand as good values. (A New Car Price Report with the Consumer Reports Bottom Line Price can help you to negotiate a good deal on your next vehicle.)
WHAT WE FOUND
From the start, the CR picks had an advantage on depreciation and fuel economy. The discounted SUVs averaged a projected 35 percent depreciation at year three, rising to 48 percent at year five. The CR-recommended vehicles are expected to hold their value better at 19 and 29 percent for the third and fifth years. When it comes to gasoline costs, the eight-passenger Pilot has an advantage at 17 mpg overall vs. the Tahoe at 14 mpg, based on Consumer Reports' testing.
At year three, the impact of the cash rebates showed the Chevrolet Tahoe and Mercury Grand Marquis to have an edge in combined depreciation and fuel costs over the CR alternatives, however both vehicles rate lower in overall performance and reliability than the suggested alternatives.
As the chart illustrates, the full-sized Mercury continued to have an advantage on the Acura TL. As a CR-recommended car, the Grand Marquis is an attractive buy with $5,000 in incentives available through July 5th. The Tahoe came in at a few hundred dollars above the Pilot—not a meaningful distinction in this financial forecast. The other full-size SUVs proved to be more expensive than the Pilot, though buyers who need a large vehicle for both cargo and towing may accept the cost difference.
RECOMMENDATIONS
Consumer Reports advocates selecting the most fuel-efficient vehicle for your needs that meets our stringent requirements for being recommended.
If attracted to a vehicle with large incentives, be mindful of the potential depreciation hit. There is a reason why the model is in low demand, whether it has poor fuel economy, it will soon be replaced with a new version, or it's no longer trendy. The vehicles that made this top 10 list have all been on the market for several years, with the GM SUVs already sitting alongside their replacements on dealer lots. And be aware that the depreciation forecasted here could accelerate should gas prices continue to escalate.
The key to making a smart purchase is to be informed and not be distracted by incentives alone. Thorough research can narrow your wish list down to proven, high-rated models before entering a dealer showroom. Upon reflection, a buyer initially drawn to these large SUVs might find the redesigned Toyota RAV4 V6 4WD could provide the passenger space, comfort, and all-weather traction required in an SUV—though perhaps less than desired. Even with a powerful 269-hp engine, this CR-recommended sport/ute returns 22 mpg.
The reward for doing the homework and compromising on size for the RAV4 is a combined depreciation and fuel cost that is less than half that of a heavily discounted 2006 Tahoe, only $5,483 over five years. For those who demand the massive tow abilities that only a full-sized SUV can offer, again, the key point is to approach this major purchase empowered by knowledge, not passion alone.
To understand the real deal, it pays to have the Consumer Reports Bottom Line Price. The CR Bottom Line Price can aid all shoppers by providing a true starting point for negotiations that factors the hidden profit known as dealer holdback and current incentives. Also, each month Consumer Reports tracks the best new car deals (available on ConsumerReports.org.)
The full Ratings and recommendations for more than 200 vehicles, along with the latest information on thousands of other products and services, are available to ConsumerReports.org subscribers. Find out how to subscribe today.
