Hybrid or no-hybrid…is it really more expensive to buy a hybrid than to go with a “regular” car? This was the question that came up around a camp fire after a few beers this past weekend.
You’ve probably heard that it’s more expensive to buy a hybrid right now, and that it’s simply not practical to buy one because you’ll never really see the benefit.
Well, that was my stance on the discussion, but rather than just blindly stick to my guns without looking anything up, I figured I’d give this a deeper look…after all, some of the arguments posed by the others were good, and made sense.
Hybrid vs. Non-Hybrid
The discussion we had was comparing a new car purchase of a non-hybrid to a hybrid. Here’s what we were working on:
We’re buying a new car for some reason. The new hybrid will cost $25k, and a similar non-hybrid costs $20k. The MPG are 35 and 25 for the hybrid and non-hybrid, respectively. The gas tank holds 15 gallons, and we’ll assume light driving of 1 tank per week.
Under these assumptions, there’s a $5k difference we’ve got to make up from the hybrid’s gas savings. Based on the 10 extra miles per gallon, and 15 gallons per tank, we’re working with an extra 150 (10*15) miles per week, which comes in at an even 6 gallons per week savings for the hybrid (150 / 25 MPG of the non-hybrid). This comes to an estimated 312 gallons saved per year (6*52).
I’m going to expand on this a little bit further than we did around the campfire (just so you don’t think we’re complete nerds). Gas prices have dropped significantly over the recent months (I just filled up at $1.36 per gallon), but we wanted to compare the costs now, as well as in high gas prices—we all know gas is more than likely going to go up again. For this example, I used $1.50, $2.00, $3.00, $4.00 and $5.00 as benchmarks. Here are the results:
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|
$1.50
|
$2.00
|
$3.00
|
$4.00
|
$5.00
|
|
|
Est. Gallons Saved
|
312
|
312
|
312
|
312
|
312
|
|
|
Est. $$ Saved per year
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$468
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$624
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$936
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$1,248
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$1,560
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|
|
Cost to recover
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$5,000
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$5,000
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$5,000
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$5,000
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$5,000
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|
|
Est. Years to Recover Costs
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10.68
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8.01
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5.34
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4.01
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3.21
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|
So, under our assumptions, at the current gas prices of $1.50, you would have to drive over 10 years to make up the extra cost of the hybrid car. But, we were willing to concede that gas prices weren’t going to stay at this low level for a long time. Once you get into the $4-$5 per gallon price range, it starts to look pretty good with only a 3-4 year break-even point. Not too bad, especially if you’re going to buy the car and drive it for a while.
But, this example shows that unless gas prices are consistently above the $4 range, it won’t make much sense financially to buy a hybrid. And, this example excludes a few other things you’d want to consider when making a purchase, or doing a complete cost comparison:
· The future value of the lost $5k. If you’re spending the extra $5k on the car, we’d ideally want to assume that you could invest this money, so we’d want to add any earnings into the equation. (Even if we’re in a recession, you could still get 2-3% interest in a CD. Doesn’t sound like much, but we’re not exactly dealing with high dollar figures here.
· The cost of a comparable used car vs. the new car replacement. New cars take a huge hit when you drive them off the lot. A comparable used car that’s 1-2 years old and in great condition would cost significantly lower than its newer counterpart.
· Tax credits. There are some tax credits you might qualify for if you own a hybrid vehicle. I haven’t looked into a lot of these recently, but they used to only cover American hybrids and not foreign hybrids. I honestly don’t know, and don’t claim to be an expert, but I know they’re out there.
· Interest costs. Not paying cash? Don’t forget that you’re paying more for your car! The added interest if you finance or fleece…oops!—lease…your car will also adjust this equation (more so in the second example below)
Now, personal finance has as much to do with emotions as it does numbers. Often times purely financial analysis doesn’t equate well in personal finance because it’s your money, and your emotions help drive your decisions. Let’s not go too far out there with this, because you can’t ignore what’s financially responsible just because it makes you “feel good,” but suffice to say there are external factors at play that affect our decisions. For example, even though it might not make sense in the above example to buy a hybrid at $2.00 per gallon gas prices because it will take 8 years to recover the $5k of extra spending, the emotional satisfaction you get from “helping the environment” could outweigh the extra costs. Of course, this assumes that you can afford to buy the car.
When we changed topics at the camp fire, we agreed that at $4.00 per gallon, the idea that hybrids are too expensive to buy didn’t really make sense. And, I think the above shows that. We also agreed that at current prices, i.e. $2.00 or less, the extra costs of a hybrid didn’t really make sense if you were going ONLY trying to save money on gas.
Prius vs. Xterra
This all looks fine and dandy, but we’re running off a bunch of assumptions here — Most notably the completely made up costs of a hybrid vs. non-hybrid. Why not take this discussion to the next level? What if I wanted to buy a hybrid? How would our little exercise pan out in that case?
To start with, I currently drive a 2001 Nissan Xterra. Yes, a dreaded SUV that’s old and gets crappy gas mileage. It’s still in decent shape, has 140,000+ miles on it, and I’m planning on driving it until it falls apart. But, what if I wanted to upgrade to a hybrid? Let’s assume that I don’t wreck my car, and it doesn’t completely die…basically that I’m going to get rid of my car today and buy a new hybrid.
And if I’m going to buy a hybrid for gas prices, I’m going to get one of the best ones out there: the Prius. Yes, the Prius clocks in at around 46 MPG compared to my Xterra’s crummy 22 MPG. A modestly equipped Prius will set me back around $22,500. KBB puts my Xterra’s value at $5,080 based on private party sale, features, mileage, and “good” condition. Let’s assume that I can sell my car for what KBB says it’s worth, and I buy a new Prius.
So, if we compare my Xterra to the Prius in the same way we compared the hybrid to the non-hybrid, this is what we come up with:
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$1.50
|
$2.00
|
$3.00
|
$4.00
|
$5.00
|
|
Est. Gallons Saved
|
360
|
360
|
360
|
360
|
360
|
|
Est. $$ Saved per year
|
$1,276
|
$1,702
|
$2,553
|
$3,404
|
$4,255
|
|
Cost to recover
|
$17,420
|
$17,420
|
$17,420
|
$17,420
|
$17,420
|
|
Est. Years to Recover Costs
|
13.65
|
|