Hybrid cars are an amazing invention and an important step toward reducing waste in a world filled with 10 MPG, gas-guzzling hunks of metal. I appreciate the engineering and technology that goes into creating a vehicle that can quietly hum along and get over 50 MPG. But there is something seriously wrong with how people seem to approach the hybrid car purchase….
And that something is math.
How People Decide To Buy Hybrid Cars
I have been around a few of these conversations. Everyone involved is always so well-intentioned, the sincerity almost passes it off as an intelligent conversation. But there is always something amiss:
Person 1: “You see that new Toyota Prius, it gets like 50 MPG’s and doesn’t even need an emissions test because it’s so green.”
Person 2: “Yeah, I can’t believe how efficient that is. I mean, you could cut your gas bill in half or less with a sweet ride like that.”
Person 1: “Yeah, that’s what I’m thinking. I get like 18-22 MPG’s or something on my current ride. If I got 50 MPG, I would be saving so much money, the car would practically pay for itself.”
Person 2: “Yeah, I mean, the payment is what, like $400 a month? If you’re saving like $250 a month or something in gas, the car is practically free. Sounds like a no-brainer to me.”
Person 1: “Yeah, I’ve got a test drive scheduled for this afternoon. It’s crazy how getting a fuel efficient car can really save you a ton of money. Heck, I can probably afford to go on that awesome vacation to Hawaii now! Thanks Toyota Prius!”
Person 2: “Totally jealous. I wonder if I could trade in my car and get a Prius too? Probably worth it. Heck, they could even roll my old loan into the new one….”
Now, that conversation may seem pretty normal to some of you. It sounds like a well-justified decision to get rid of the low-MPG ride and pick up a hybrid at little cost after factoring in the gas savings. I know many people who have done this very thing. But let’s run the numbers on this hypothetical scenario and see if this person is truly getting half off a hybrid car, or actually just wasting money.
Let’s say he trades in his old “clunker” for $3,000 (even though he could get $6,000+ private sale)
The new Prius costs $24,000 – $3,000 down = $21,000 x 60 months at 3.68% = $400 per month
After 60 months, he’ll have paid about $2,000 in interest, bringing the total purchase price to $26,000.
BUT, don’t forget that with a car loan, comprehensive insurance coverage is REQUIRED. So that means his $60 a month is now $120 a month for auto insurance. Over a 5 year period, that’s an additional $3,600.
So the total car price is $29,600.
Now let’s talk about what his car in NOW worth.
Edmunds.com has some great stuff on it, and a little gem I found over there is this infographic on how much a new car depreciates. The numbers could make a grown, hybrid-owning man cry (not that it would take much) and are always tough to look at, knowing how many NEW cars I see on the road on a daily basis. Let’s apply this to our example above.
After 5 years, a NEW car is worth 37% of its original value.
The $24,000 Prius is now worth $8,880.
But, What About The Gas Savings?!
“You’re totally missing the point here. Gas is stupid expensive, haven’t you been watching the news? The Prius cut the gas bill in half, OR MORE! The savings is in the 50 MPG’s!”
You’re right, I was being unfair. Let’s calculate the gas savings. But since people always seem to make this calculation wrong, let me show you the RIGHT way to do it.
People always seem to compare their current car with the new, hybrid car. WRONG. They’re buying a new car anyway, so they need to compare the new hybrid with a good, used high-MPG car, because their current car is irrelevant. We will compare the cost of the Prius and the cost of a good, used car with High MPG’s, the Honda Civic.
Toyota Prius – 50 MPG on average.
2000 Honda Civic HX – 33 MPG on average.
Let’s say the average mileage on these cars is 10,000 annually. And gas costs $3.50 per gallon on average.
Total Annual Cost
Toyota Prius annual gas cost – $686
2000 Honda Civic HX annual gas cost – $1,060
Current car at 18 MPG – $1,944
Totals Over 5 years
Toyota Prius – $3,430
2000 Honda Civic HX – $5,300 ($1,870 more than Prius)
Current car at 18 MPG – $9,720 ($6,290 more than Prius)
Conclusion: The Toyota Prius saved $1,870 in gas over 5 years compared to the Honda Civic. $6,290 savings over the current 18 MPG vehicle.
I know I just threw around a lot of numbers. But here’s the bottom line:
YOU WILL SPEND $30,000 ON A CAR ONLY WORTH $8,900 TO SAVE $1,870 IN GAS OVER 5 YEARS.
If that doesn’t look like a good deal it’s because it isn’t. In fact, it’s a complete waste of $19,000. Buying a new, hybrid car is like taking a can of gasoline and book of matches to $19,000 of your hard-earned money. But it’s even worse than you think.
Opportunity Cost. That $19,000 is not just a pile of cash buried in the backyard. It’s real money that could have been put to work. Here’s how much that $19,000 would be invested at 7% for 5 years:
I’ll leave it at that. And just remember, this is the BEST case scenario when buying a new car. There are still many people who by low MPG cars and are not saving ANY gas money. It only gets worse from here. Bottom line: You don’t need a new car.
Comments: Have you justified get a hybrid based on the “great MPGs”? Did you ever do an ROI on that purchase? Does the math make you reconsider that purchase? How many people out there are currently driving a hybrid?