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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….”
The Math
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.
Exciting.
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.
Bottom Line
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:
$26,650 Wasted
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?
This is actually incorrect. Though the gas savings portion is accurate, the resale value of a hybrid car, especially that of a Prius, does not depreciate at the same rate as other cars.. I had an 8 year old Prius with 170,000 miles on it that still sold at $8500. After 8 years. If you look at many used hybrid cars for sale, they still cost a lot of money–more than standard cars– long into their use. The infographic referenced is not inclusive of hybrid cars and is therefore irrelevant.
While there are a ton of reasonable assumptions made in this post, I agree with the basic premise: there aren’t many ways you can justify buying a brand new car, and gas mileage definitely isn’t one of them. So how about a 8-year-old hybrid instead of an 8-year-old civic? That’s a comparison I’d be curious to see!
There is something to be said for having a new car, and a 2000 honda civic isn’t all that exciting. What about a 5 year old honda civic? I bet you’d still save a lot, but now quite as much as with the 14 year old car with well over 100,000 mileson it and will need much more maintenance.
Terry, let’s use your assumption of 63% depreciation over 8 years instead of 5. That only saves another $1,200. You are still FAR, FAR behind on the ROI.
I am also curious about that comparison. I’m waiting until I see some more 300k mile hybrid cars before I can assume they’re worth purchasing with 150k miles on them. But I’m sure it’s possible, and could actually be a decent deal at that point. But most people buy a new hybrid thinking they’ll save all this money. I felt it only fair to debunk that myth with actual MATH.
Great thread here with some Prius cars that are over 300k: http://priuschat.com/threads/299-999-mile-club.79235/
That is a post for another time, but I have found 10+ year old civic’s don’t depreciate much, and hold their value steady for the rest of it’s useful life. And maintenance is nil, or less compared to newer cars, due to availability of parts, simplicity of design, etc. Personally, the cars I buy don’t depreciate, I get 5-10 years out of them, and then sell them for what I bought ’em for. Best way to buy cars, period.
For further reading, check out my guest post on buying a used car here
Preach on 🙂 Totally agree!
Well why don’t you just go punch Mother Nature in the face then?
I think you’re not comparing like things here.
Yes, you HAVE to buy comprehensive coverage w/a car loan, but you also GET comprehensive coverage. Maybe it’s not worth the difference, but it’s not just setting money on fire.
You’re also comparing a new Prius with an older Civic. The right thing to do here would be to either compare a new Prius with a new Corolla (or maybe even Camry…it’s somewhere in the middle, size- and amenity-wise, no?) or more realistically, compare that older Civic with an older Prius. They’ve been making them since 1997, after all.
Also, tax credits and the uncountable benefit of getting to drive in carpool lanes and so forth.
ALL that said, even if you were including everything, I suspect you’d still be right that buying an older gas car would be better (an older diesel might be even better). Any time cars have a “status” attached to them, there’s always premium for them. I doubt it would be different in this case.
Hope all is well, bud
Prius driver here. 🙂 We have over 100k on our 2006 Prius. We justified the purchase based on reliability and gas mileage was a bonus. Out Corolla gets 30 MPGs, so the 40 MPGs doesn’t save us a ton. We bought it 3 years used, too, so that mitigated the highest depreciation drop.
I’m a bigger fan of “clean” diesel. Great mileage and pretty much anyone can fix a diesel. We just decided the pollute too much here. It is also a shame that they cost more here versus a regular gas vehicle too.
Of course you forgot to mention one of your favorite points… buying something for a tax deduction! I think the Prius is out of tax credits, but many other hybrids still offer them.
Thanks for chiming in! I compared to a good used car, because the reason Person 1 wants a NEW car is MPG’s, and most go straight to the dealership and get a NEW car, not a used one. I wanted to show that going used is a MUCH better, thus the comparison.
Looks like the Prius plug-in tax credit is $2,500, which is pretty awesome. But again, that’s on a 2012 or newer model. You’re still forced to buy a NEW car, and thus are burning all that money in depreciation.
And I agree, the “status” thing kills me. But it kills new car buyer’s pocket books even more.
3 years used saved you like 40%, so at least you didn’t throw THAT much money out the window. 🙂 I’ll buy it off you when you’re done with it 😉
Electric cars get the sweetest deal, but are also $10k+ more. I think I’ll go electric muscle car when they are around $5,000 and proven reliable 🙂
Here’s the list of incentives, in case anyone is interested: http://www.fueleconomy.gov/feg/taxevb.shtml
My dad bought a hybrid back in 2002 and he did the full ROI calculation and figured out it was 7 year breakeven point given the gas prices at that time and the tax breaks available. Of course if you’re comparing any new car to a used car the new car is going to look like a terrible investment, but some people (like my parents) are just not going to buy any more used cars because of their terrible experiences with them so it’s more realistic to compare to their alternative purchase, a new car. Anyway, the big selling point for the hybrid for my dad was the ability to drive in the HOV lane. As he was a megacommuter at the time, that was a huge perk. Cutting his commute time plus the 7 year breakeven point pushed him to buying it, and I think it was a good decision. They still drive the car 11 years later, though they no longer have the HOV perk.
Should global warming play any role in our purchase decisions?
As the song says “It ain’t necessarily so”
A lot can depend on the circumstances, and what you are doing with the vehicle. I bought my Prius new in 2007, and it generated a metric boatload of income for me over 4-ish years.
I’ll note upfront that this is an atypical situation: In a lot of ways, I drive for a living. I work as a repair tech servicing equipment in small towns and out of the way places. I put an average of 5000km/month for work, which is 60,000km/year, or in USican, somewhere north of 36,000 miles per year, with personal driving on top of that. So, not the average.
I was being paid a vehicle allowance, with a per km rate beyond a base amount, and ended up clearing a thousand or more above operating costs (not depreciation) every month.
The Prius is a great, low-maintenance vehicle with plenty of cargo space. It’s just about ideal as a high-mileage work vehicle, which is why in many places the words “taxi” and “Prius” are nearly synonymous. But for the typical commuter, I absolutely agree with you. When people ask me if they should buy a Prius because of the gas savings, I tell them to buy a used 2-door hatchback with a good reputation. The mileage is almost as good, and it costs a lot less.
With so many cars now getting MPG in 30’s, a hybrid isn’t worth it to most. Saving on gas doesn’t add up over the life of the car. Plus, I’ve read stories about how states are bringing in less money from gas taxes because of hybrid and electric cars. A few states are talking about adding an annual fee for these cars since they avoid the gas tax. The stories have said it will be between $100-$200 a year.
I don’t understand the electric vehicle/hybrid argument. Yes, they save you in fuel, but do you know how much environmental toll it takes to produce the batteries for these cars? Look into it, it is not good!
Really,It is very useful post about Hybrid car. I was finding this kind of article since 2 to 4 weeks but this is the first one which gave entire information of Hybrid car. Thanks for sharing this informatics blog.
Interesting…. Thanks for the post. I’ve always wanted to run the numbers like this, but never got around to it. Thanks again.
Jacob,
Again – another excellent post!
Seriously, are there STILL college students (morons) buying into the al gore b.s. of global warming? OMG! I was a “liberal arts” major and even I am not buying that bs (or a prius)!
We paid $16,XXX(I forget) cash for a 2009 Prius with less than $20,000 miles on it. At the time, most of the comparable non-hybrid cars we were looking at (Honda Civics, etc.) were at least $13,000 or $14,000. We ran the math at the time and found ourselves ahead with this purchase easily.
Buying a new car is almost always a raw deal…but used? It depends. Our car purchase was a great one and I don’t regret it one bit.
I’m not sure this is really an accurate picture. We’re currently considering buying a (used) Prius. We have an expanding family (about to have a second kid plus a large dog) and want some way to fit two car seats, a dog, and luggage. A hatchback gives us that option via putting the dog in the hatch. So that’s my background. For us, the math looks something like this:
Current vehicle: 2009 Hyundai Sonata, 83k miles, 27 mpg (combined). KBB says I can sell it private party for around $8500.
Potential vehicle: 2010 Prius, 40k miles, 50 mpg (combined). Currently listed on craigslist for $15100, so let’s just say $15k.
Difference in price: $6500. I would sell my current car, then use profits + savings to pay cash for the Prius, so no comprehensive insurance.
Also, I think for most of us, 5 years is too short of a time horizon to evaluate savings over. We should be shooting for 10 years w/cars (unless you have a changing family situation like we do). Assuming 12k per year for mileage & gas at $3.50/gallon, that gives gas costs of
Sonata: $1555
Prius: $840
Difference: $715 (savings)
So in this case, I will make back the extra $6500 I paid for the Prius in 9.1 years. In addition, at the end of the 9 years, I’ll have a car with 160k miles (the Prius) vs. a Sonata with 200k miles on it, meaning I should be able to get an extra few years of continued gas savings out of the Prius vs. having to replace the Sonata (assuming a lifetime of 200k miles).
So it’s not always so clear cut, I don’t think.
Wow. Mind blown. We have a 32 mpg car that cost 12k, but because we drive in the city, we see ZERO gas savings considering all traffic is stop and go. We wont fall for the same mistake next time.
Jacob is my math off here? If you look at it year by year
1 year 19k*7%=1330
2 year 21,330*7=1493.10
3 Year 22,823.10*7%=1597
4 year 24,420.10%*7%=1709.40
5 Year 26,129*7%=1829.03
27,958
Almost. The second calculation is off by $1,000. 19,000 + 1,330 = 20,330.
BTW, I used the Dave Ramsey investing calc. located here.
Yeah, the new car thing is definitely a HUGE trap, and the bait is always “SAVINGS SAVINGS SAVINGS!” Whether it’s MPG’s or some financing junk, it’s NEVER the best deal.
The fact that you’re buying a 3 (almost 4) year old car is saving you a TON, which is awesome. I still think you can save a LOT more by getting a used Wagon or hatchback. Honda Civic hatchbacks are incredibly cheap (like $3-4k with under 100k miles), get like 33 MPG’s and you’d come out way ahead. If you need a 4-door, the Honda Fit can be had for $8k or less with 100k miles and gets 31 MPG. Both of these cars will last longer than 200k with proper maintenance. Heck, my ’94 Accord is at 298,500 and my daily driver. Paid $1,600 and have put almost 100k miles on it.
The point of the post is to show that depreciation is a financial killer, and MPG’s is only a SMALL savings unless you are a MEGA-commuter. Good, used cars that are 5-7 years old AT LEAST will give you the most savings with the least financial hit over the years.
Glad you’ve enjoyed the Prius. The only bummer is how little it’ll be worth in 5 years. But at least you bought slightly used so you saved quite a few thousand right up front.
I’m a used car guy all the way, and would NEVER buy a new car. I cringe looking at the numbers (obviously 😉 )
Thanks Jim. I have had this in the queue for a while, felt it was time to let the rant out 🙂
No prob. Peter. I had heard about it so much and people seem to think it’s some sort of investment. Cars are depreciating assets, 99.99% of people are losing with their car purchase. I recommend buying a car that won’t depreciate at all (if possible), and then upgrading every 5 years or so. Keeps if fun, and makes your car ownership not a financial loser 🙂
I’ve never looked that up before, interesting. I care about the environment a great deal as well, but I don’t have the money to throw at a Prius right now. Maybe in 5 – 7 years when the prices for down below $4k…?
Wow, didn’t know about that. Interesting.
My commuter cars have always gotten 30+ MPG and I don’t spend more than $2,000 on any of them. I don’t need to spend $15k+ to “save” $400 a year.
Sounds like you worked the numbers well for your situation. And I agree, seeing the thread of 300k+ Prius cars shows they are very reliable.
And I give the same advice. A good, used Honda or Toyota with 30 MPG will save them more than any hybrid.
10 years from now, though….these cars will be SUPER cheap, and hopefully electric will be even cheaper.
Though, there’s always the possibility of teleportation….
Great question. Yes. You should not buy an 8 MPG gas hog if possible. You should consider your car’s emissions and make sure it’s tune up for maximum efficiency and minimum pollution.
But don’t waste $20k to help the environment just a LITTLE bit unless you have the cash lying around. And in that case, peobably more proactive things you could do with it to help….like plant a TON of trees…..and still drive around a low-emission, 30 MPG civic or something.