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:

 \$1.50 \$2.00 \$3.00 \$4.00 \$5.00 Est. Gallons Saved 312 312 312 312 312 Est. \$\$ Saved per year \$468 \$624 \$936 \$1,248 \$1,560 Cost to recover \$5,000 \$5,000 \$5,000 \$5,000 \$5,000 Est. Years to Recover Costs 10.68 8.01 5.34 4.01 3.21

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:

 \$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 10.24 6.82 5.12 4.09

Wow, those numbers changed a good bit…on both ends.  The 24 MPG difference causes the gallons saved and estimated money saved per year to really jump up there.  But, this is mitigated by the fact that there’s a huge difference between what I’ll be paying for the Prius and what I’m getting for the Xterra.

This might seem a bit extreme, but I could easily see a scenario where many people would be faced with a high cost to recover like I’m facing if they have a newer car that’s old (say 4-5 year old car) and are looking to purchase a new hybrid that’s a little more sporty and pricey than the Prius (think sell for \$15k and buy at \$30k).  If this is the case, and you typically switch cars every 3-5 years, it probably doesn’t make sense financially to buy a hybrid.  And that’s assuming gas stays around \$4-\$5 per gallon.

One mitigating factor is that I typically drive cars into the ground.  I’ve only had 2 cars in my 15 years of driving.  I mention this because this personality trait would make it almost certainly a wash to buy a hybrid because I’m the type of person that would keep it and drive it into the 6-10 year range in order to receive the long-term benefits of the hybrid’s gas savings.  However, this trait also makes me more likely to wait and purchase a hybrid only after my car dies, which will most likely be 3-5 years from now, and this example we’ve gone through won’t be applicable due to advances in technology.

## Conclusion

So where does that leave us?  Right now it’s more expensive to buy a hybrid than a non-hybrid…but by not as much as you probably thought.  Even with higher gas prices, you’re still looking at a 3-5 year window to recouping your additional expenses, but these additional costs could be mitigated by the personal gratification you receive from driving a hybrid.

One good thing is that there are more hybrids on the road today than ever before, and the technology is evolving.  As the prices for these cars go down, they should eventually replace non-hybrid vehicles.  The only problem they face now is that the cost of these vehicles really need to be the same as their non-hybrid counterparts so they make sense to purchase no matter what gas prices are.

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