Is a Hybrid Worth It?

Introduction

The rampant complaining about gas prices is enough to put an army of Eeyores to shame. At last, however, it seems that Americans are starting to put their money where their mouth is. Some are forsaking everything you ever thought was cool for a scooter that gets 80 mpg.1 , 2 Others have established organizations offering incentives to car poolers3 or encouraging employer rewards for conscientious commuters.4 Mass transit systems are expanding. Hybrid vehicles are becoming more and more popular, with most manufacturers planning to significantly increase the number of available hybrid models in the near future,5 a figure that has already tripled since 2003.6 Various levels of government are beginning to offer incentives for hybrid ownership, a trend that will likely accelerate as alternative fuel and hybrid research continues to develop.7

Of all these new developments, the majority of the hype in 2005 centers on the gas-electric hybrid automobile. Ecologically, there is no question it is the best consistently available passenger vehicle out there, but what about what really matters to Americans? What about money? Is purchasing a gas-electric hybrid financially beneficial? Will you actually save enough money on gas to outweigh the incurred car payment? Might a hybrid be worth it even if you don’t?

Well, that depends. How much do you drive? What gas mileage do you get presently? What is the trade-in value of your present vehicle and how much do you still owe on it? Let’s explore those variables, along with many others, to determine if buying a hybrid is “worth it.”

Gas Savings

People are obsessed with spending less money on gas. Websites have even been created to help the penny-pinching consumer find the cheapest option close to home.8 When prices are skyrocketing all over town and scouring for deals brings no relief, however, many look to better gas mileage for help. How much money can improved gas mileage put in your pocket every month? That depends on a few variables:

  • $gas – current cost of gas (U.S. dollars per gallon)
  • GMnow – gas mileage of current vehicle (miles per gallon)9
  • GMimp – gas mileage after vehicle improvement (miles per gallon)
  • Distance – monthly distance driven (miles per month)

After gathering this information, the amount saved each month on gas ($saveU.S. dollars per month) can be calculated using the formula shown in Figure 1.

Figure 1. Calculation for money saved each month by improving gas mileage

Examples

To illustrate the above, let’s calculate the potential monthly gas savings of a 2006 Toyota Prius over a 1999 Honda Accord. The variables might be defined as follows:

  • $gas – $2.50 per gallon (assumed)
  • GMnow – 27 miles per gallon (1999 Honda Accord)10
  • GMimp – 55 miles per gallon (2006 Toyota Prius)11
  • Miles – 1,500 miles per month (assumed)

Plugging this into the equation in Figure 1 results in a monthly savings ($save) of $70.7,12 reducing the projected monthly gas cost from $139 to $68.2.

Gas price ($gas) fluctuations or changes in the gas mileage (GMimp) of the potential new ride will affect these savings – although not linearly. As the improved gas mileage increases, there are diminishing returns. For example, given a gas price of $2.50 and the base case assumptions, increasing your fuel efficiency from 27 mpg to 100 mpg will save you about $100 per month. If you tack on another 50 mpg, however, the additional savings are only about $10 per month. Figure 2 displays these trends for various gas prices using our specific case assumptions: 1,500 miles driven per month and looking to replace a 1999 Honda Accord.

Figure 2. Monthly savings compared to a 1999 Honda Accord assuming 1,500 miles driven per month

Car Payments

Now that we know how much money can be saved by improving gas mileage, it’s time to look at where at least some of that saved money will be going: a car payment.

Loan Amount

The first step in determining a monthly car payment is calculating the loan amount using the following:

  • $newcar – sticker price of the new vehicle to be purchased (U.S. dollars)
  • $oldcar – trade in value of your current vehicle (U.S. dollars)13
  • $owed – money still owed on your current vehicle (U.S. dollars)

Plug these variables into the equation in Figure 3 to determine the approximate loan amount ($loanU.S. dollars). The 1.15 factor included in the equation is to account for typically incurred costs not included in the sale price.14

Figure 3. Calculation to estimate loan amount

Examples

To illustrate this calculation, let’s continue with our previous example of buying a 2006 Toyota Prius to replace an existing 1999 Honda Accord. The variables could break down as follows:

  • $newcar – $21,27515
  • $oldcar – $4,10616
  • $owed – $0 (assumed)

Plugging these values into the equation in Figure 3 results in a loan amount ($loan) of $20,360.

Monthly Payment

The determined loan amount can best be compared with the monthly gas savings calculated earlier by converting it to monthly payments. These payments depend on the loan amount (calculated above), loan length (lengthmonths), and interest rate (ratepercentage). Using these variables, the monthly payment can be calculated and then compared to the current car payment17($nowpayU.S. dollars per month) to find the overall monthly impact ($paymentU.S. dollars per month) as shown in Figure 4.

Figure 4. Calculation of monthly payment impact18

Examples

Continuing the former example, the monthly payment can be calculated for the purchase of a 2006 Toyota Prius using the following variables and assumptions:

  • $loan – $20,360 (as previously calculated)
  • length – 60 months (assumed)
  • rate – 5.25% (assumed)
  • $nowpay – $0 (assumed)

Plugging these values into the equation in Figure 4 results in a monthly payment increase ($payment) of $387.19

Some examples of gross monthly payments resulting from different combinations of interest rates and loan amounts are shown in Figures 5, 6 & 7, reflecting 30, 60 & 120 month loan periods, respectively.

Figure 5. Monthly payments for 30 month loans
Figure 6. Monthly payments for 60 month loans
Figure 7. Monthly payments for 120 month loans

As you can see, the length of the loan plays a large part in determining the monthly payment.20 The interest rate does have an impact, but it is much less significant.

Hybrid vs. Economy

At this point, the short road to answer to the question posed in the title of this article seems quite obvious. Isn’t the only remaining step to subtract the calculated monthly gas savings from the monthly payment increase and then go for it if the result is positive?21 If such was the case, you would be limited to “hybrid or nothing” and wouldn’t have considered the traditional method of gas savings, the economy car. Could this less expensive and less efficient option be more economically sound?

Prius vs. Corolla

Let’s investigate by continuing our example of looking to replace a paid-off 1999 Honda Accord with something more economical. We’ve already looked at the possibility of buying a 2006 Toyota Prius and found that it could save $70.7 per month in gas but would add $387 a month for the car payment. Now, let’s throw in the value-driven 2006 Corolla with a combined mileage of 36 mpg22 and a sticker price of $14,005.23 Applying the same equations with the same assumptions yields gas savings of $34.7 per month and a loan amount of $12,000, with a corresponding monthly payment of $228. Comparing the monthly expenses of each choice, the Prius would result in a net expense of $316 and the Corolla a net expense of $193. Thus, although neither option is economically advisable based purely on gas savings, the 2006 Prius would be $123 more expensive per month than a 2006 Corolla.

Figure 8. Comparison of the switch to a Corolla or a Prius from a 1999 Accord

The same comparison could be done with various other hybrids and economy vehicles and the results are usually the same: the more expensive hybrids cost more on a monthly basis, even when considering their high gas mileage. Figure 9 lines up the leading economy cars with most of the presently available hybrids according to monthly savings over the same 1999 Honda Accord. It reveals that at least ten 2006 economy cars would be more economical than the most competitive hybrid, the Honda Insight, although none of the options keep you out of the red.

Figure 9. Comparison of replacements for a 1999 Accord

Future Comparisons

The numbers involved in comparing these two vehicles will likely soon change. Automotive companies will eventually cover the extensive research costs that led to the first hybrids. Increased competition will drive down prices considerably and hybrid gas mileage is likely to continue to increase. How much change is enough change? How much would the hybrid price have to drop, fuel efficiency increase, or gas prices skyrocket before a hybrid becomes economically viable?

Future Hybrid vs. Existing Vehicle

For streamlined analysis, the above equations can be combined into various inequalities. For example, given the current vehicle information, the loan information and the gas prices, the maximum sticker price can be determined for a corresponding gas mileage (Figure 10). Alternatively, the equation could be manipulated to show the opposite relationship, the minimum gas mileage for a corresponding sticker price (Figure 11).

Figure 10. Maximum sticker price given all other variables
Figure 11. Minimum gas mileage given all other variables

Future Hybrid vs. Future Economy

Before a new hybrid becomes economically the best option, it will have to first beat out a new economy car. By making a few minor assumptions, some basic graphs can be generated to easily determine just how much things would have to change for this to be the case. And when they do, you can be first in line at the dealership.

The assumptions:

  • Economy car efficiency – With all of the research going towards hybrid technology and alternative fuels, it is reasonably safe to assume that the economy car is close to its peak performance. Therefore, we will go with a sticker price and gas mileage at or better than the best of the current industry: $12,000 and 40 mpg.24
  • Loan characteristics – As long as the rate and length are kept consistent within the comparison, what rate and length is used will not affect the relative results. This analysis will assume a loan length of 60 months at a rate of 5.25%.
  • Driving habits – While driving more will increase the impact of improved gas mileage, this analysis will assume 1,500 miles are driven each month.25

After making these assumptions, the maximum price of a new vehicle can be plotted against its fuel efficiency for various gas prices using the previously explained equations. Find the gas mileage along the X axis and follow it up to gauge how “cheap” the hybrid (or other more-expensive vehicle with better gas mileage) will need to be to give it an economical advantage when compared to purchasing a $12,000/40mpg economy car. For example, if the 2009 Honda Civic hybrid ran at 80 mpg and gas was $3.50, we can see from the graph that it would need to be less than $15,000 to be economically preferable over the assumed 2009 economy car.

Figure 12. Maximum economically justified hypothetical hybrid sticker price vs hypothetical hybrid gas mileages for various gas prices
Figure 13. Zoomed in on Figure 12

Other Factors

There are several other factors that are worth serious investigation before deciding for or against a hybrid purchase.

Advertised vs Actual Gas Mileages

Many cars are criticized for not living up to their advertised efficiency. Hybrids, especially, have come under recent criticism for this very issue. Excited new hybrid owners expecting to breach the half-century mark of gas mileage may end up disappointed when their Prius manages an average of only 44mpg or their Honda Civic Hybrid a meager 36mpg. Don’t blame the hybrid manufacturers, however; non-hybrids fall short of advertised efficiency in similar fashion. The cause for this lies in the EPA testing method, which has been in use since 1985. The test is consistent, but the critics say it is consistently inaccurate as it does not account for modern highway speeds and congested city traffic. Thus, the ratings will usually work well for comparative purposes, but you will have to look elsewhere for real-world fuel efficiencies. Two such places are Greenhybrid.com, where a Real Hybrid Mileage Database is set up,and Fueleconomy.gov, where users are allowed to share Your MPG

Government Incentives

There are various government incentives for hybrid owners at the federal, state and sometimes local level. In 2005, the U.S. federal government offered tax breaks that will switch over to “tax credits” starting in 2006, the value of which depends on the hybrid model. Tax refunds can be used to offset some of the hybrid expense and might even become the determining factor in a close decision. A $284 billion highway bill was also passed into law that includes a provision allowing states to open HOV lanes to all hybrid cars rated at least 45 miles per gallon – even with just one passenger. State incentives range from free hybrid parking to various tax rebates and credits. At the local level, cities such as Baltimore have begun to offer incentives such as hefty parking discounts.

Performance

The first concern that pops up for many power-hungry Americans when they hear the word “hybrid” is a perceived drop in performance. While performance vehicles will always need more energy than economy vehicles, hybrid technology is actually making increased power less “energy expensive.” There are still issues preventing a hybrid from being a total performance vehicle, but hybrids are not the weak alternative by any means. Hybrid technology is even being investigated by several Formula One teams as the “next step” in engine evolution performance and small hybrids such as the Lexus RX use the hybrid system like an “electric supercharger.”

Maintenance

While there are some inherent fears in buying an “unproven” technology, a hybrid isn’t a technologically risky purchase. As of late 2005, both Honda and Toyota hybrids come with long warranties. The Insight has an 8yr/80,000mi warranty on the powertrain (including batteries) and a 3yr/36,000mi warranty on the rest of the car. The Prius has a 8yr/100,000mi powertrain warranty and a 3yr/36,000mi warranty on the rest

Hybrid regular recommended maintenance is much like that of a typical ICE vehicle: oil changes, filter changes, engine coolant level checks, brake inspections, tire rotation and inflation, etc Some are concerned about the availability of properly trained and knowledgeable hybrid mechanics, but it is reasonable to assume that these will materialize as the demand increases. The warranties also counter this concern by effectively providing a cushion before the need to find a mechanic outside the dealer

Hybrids have batteries that will need to be replaced in eight to ten years, but they also have the benefit of longer lasting brakes due to regenerative braking. Hybrids have more electric systems to break down,but non-hybrids have more mechanicalsystems to break down. The maintenance concerns seem to balance out.

Value Retention

Value retention is another area not considered in the above calculations. The Prius debuted in 2001 for $19,995 and the same year model is now worth $15,058, a 75.3% retention of value over the five year period. The Corolla retailed at about $12,568 in 2001 and now sells for about $7,496, a 59.6% value retention over the same period.

Figure 14. Summary of value retention for various vehicles from 2001-2006

Looking at the values in Figure 14, it seems that comparing the Corolla to the Prius is fairly representative of the hybrid advantage in this area. The Prius is holding its value better than any other vehicle and the Honda Insight (the only other hybrid that has been around long enough to include) is among the best of the economy cars.

Alternative Fuels

Many think hybrids are a temporary fad before alternative fuels replace them. Alternative fuels such as liquified petroleum gas (LPG), liquified natural gas (LNG), hydrogen, alcohol, fuel cells, solar power and bio-diesel are in various stages of development and availability. It will most likely be a while before any of them are able to achieve the prominence level of gas-electric hybrids, so even if you are one who always wants the “greenest” car available, the hybrid is your pick for the next five to ten years.

Personal Taste

There are many other issues related to personal taste that might sway you one way or the other. Some feel attracted to the “hype” around hybrids and others are comforted by the proven economy vehicles. Hybrids are being introduced as the high end trims for many models, such as the Honda Accord, so the accompanying luxury features may be convincing. Others might be turned off by the lack of hybrid selection now available. There’s no getting around the effect of personal taste on the decision; if the monthly gas budget was the only concern, everyone would be riding bikes or walking.

Conclusion

While no “green” person would ever advocate buying a hybrid for purely economic reasons it is painfully obvious that existing hybrids lack the ability to make up for their steep prices with gas savings. While a hybrid would present significant savings over something like a new Ford Super Duty, you would always save more with any of a number of economy cars.

Hybrid technology is just entering the mainstream, however. As gas prices rise and hybrid technology improves and cheapens, don’t be surprised to find hybrid owners in the green.


Notes

  1. Vespa USA. VespaUsa.com. Vespa. 2005. Accessed November 2005 at http://www.vespausa.com/.
  2. Motor scooters gain in popularity. MSNBC.MSN.com. The Associated Press. 2005. Accessed November 25 at http://www.msnbc.msn.com/id/9041933/.
  3. NuRide – Ride the Network. NuRide Homepage. NuRide Inc. 2005. Accessed November 2005 at https://www.nuride.com/nuride/main/main.jsp. NuRide is one such organization.
  4. CommuterChoice.com: America’s Way to Work: Employer Resources. CommuterChoice.com. 2005. Accessed November 2005 at http://www.commuterchoice.com/index.php?page=employers. CommuterChoice is a nationwide partnership to help employers reward their employees through addressing their commuting needs.
  5. News and Information about Hybrid Vehicles. FuelEconomy.gov. US Department of Energy & US Environmental Protection Agency. Accessed November 2005 at http://www.fueleconomy.gov/feg/hybrid_news.shtml. See table entitled More Hybrids Coming Soon.
  6. Available Hybrid Models Triple Since 2003, According to Autobytel. TheAutoChannel.com. The Auto Channel. 2005. Accessed November 2005 at http://www.theautochannel.com/news/2005/06/29/136225.html.
  7. Funding Alternative Fuel Activities. NREL.gov. US Department of Energy Office of Energy Efficiency and Renewable Energy. 2003. Accessed November 2005 at http://www.nrel.gov/docs/fy03osti/33442.pdf.
  8. Gasbuddy.comGasPriceWatch.com, and FuelMeUp.com are three examples of such websites. The Federal Governmentand MSN also provide similar services. 
  9. The gas mileage on the sticker is often not accurate, but it can be a good way to compare vehicles. See the section on Advertised vs Actual Gas Mileages
  10. Gas Mileage of 1999 Honda Accord. FuelEconomy.com. US Department of Energy & US Environmental Protection Agency. Accessed November 2005 at http://www.fueleconomy.gov/feg/noframes/15104.shtml. The combined mileagelisted on FuelEconomy.com will be considered the official reference gas efficiency within this article.
  11. Gas Mileage of 2006 Toyota Prius. FuelEconomy.com. US Department of Energy & US Environmental Protection Agency. Accessed November 2005 at http://www.fueleconomy.gov/feg/noframes/22016.shtml.
  12. The exact value of $70.7071 was rounded to three significant digits. Future values are also rounded appropriately.
  13. The cost of the new car and the amount owed on the old car are easily determined, but the trade in value may vary depending on the market and location. Edmunds Used Car Appraiser and Blue Book are great resources for determining the worth of your used vehicle.
  14. AmeriCU’s Loan Rates. AmeriCU.org. AmeriCU Credit Union. 2005. Accessed November 2005 at http://www.americu.org/loan_rates.htl. The average loan amount for new cars purchased after 2003 is 115% of the sale amount and has an interest rate of 5.25%.
  15. Prius. Toyota.com. Toyota Motor Sales, U.S.A., Inc. 2005. Accessed November 2005 at http://www.toyota.com/prius/index.html?s_van=GM_TN_PRIUS_INDEX. The Manufacturer’s Suggested Retail Price (MSRP) will be used to compare all new cars within this article, as retail prices vary.
  16. Edmunds used Honda Accord car appraisal. Used Honda car pricing. Edmunds.com. Edmunds.com, Inc. 2005. Accessed November 2005 at http://www.edmunds.com/used/1999/honda/accord/11976/options.html. Used car values within this article are determined using Edmunds Used Car Appraiser, which features True Market Value Pricing. In all cases, the default options are left and the most inexpensive trim is used. Other trim, options, areas and vehicle conditions may result in varying values. The “Trade-In” value is used to reflect the worth of the currently owned vehicle, the “Dealer Retail” value is used later when analyzing Value Retention.
  17. Be careful when comparing your current monthly payment to a new payment, however. The short-term monthly budgeting may be the same, but the remaining length of the payments should also be considered. For example, it would seem to make sense to sell a car with a $300/month payment in favor of a new one with a $200/month payment, but that would not be so (holding all other factors economically equal) if the new payment was going to continue for a few years and the old payment had only a couple of months remaining.
  18. The equation shown assumes a future value (cash balance you want to attain after the last payment is made) of zero and that payments are made at the end of the period (month).
  19. This is not necessarily the total payment of the new car, as the existing car payment is subtracted off in the calculation. If you were currently paying $200 per month on a car, for example, the net monthly payment increase would be $200 less than the gross new car payment.
  20. Shorter loans have significantly higher monthly payments, but some may still choose to go this route as the total amount paid over the life of the loan is smaller.
  21. One should also realize this kind of monthly analysis is only accurate over the life of the loan. Once the loan payments are removed from the equation, the only remaining factor is the gas savings, putting the hybrid at a distinct advantage. To determine how long it would be before the gas savings after the loan made up for the net loss during the loan would require a much more involved economical analysis.
  22. Gas Mileage of 2006 Toyota Corolla. FuelEconomy.com. US Department of Energy & US Environmental Protection Agency. Accessed November 2005 at http://www.fueleconomy.gov/feg/noframes/21882.shtml.
  23. Corolla. Toyota.com. Toyota Motor Sales, U.S.A., Inc. 2005. Accessed November 2005 at http://www.toyota.com/corolla/index.html?s_van=GM_TN_COROLLA_INDEX.
  24. A MSRP of $12,000 and a gas mileage of 40 mpg are conservative assumptions with respect to the car information listed in Figure 9.
  25. Household Transportation Report: Household Vehicles Energy Use: Latest Data & Trends. EIA.DOE.gov. Energy Information Administration. 2001. Accessed November 2005 at [http://www.eia.doe.gov/…table-a03.pdf. Based on the information given in this report, 1500 miles per year is a conservative estimate.
  26. Surprising Facts About Gas Mileage. ConsumerReports.com. Consumers Union of U.S., Inc. October 2005. Accessed November 2005 at http://www.consumerreports.org…surprising-facts-about-gas-mileage.
  27. Gertner, John. Hybrid Mileage Comes Up Short. Wired.com. 11 May 2004. Accessed November 2005 at http://www.wired.com/news/autotech/0,2554,63413,00.html.
  28. Hybrid Mileage Database. GreenHybrid.com. Greenhybrid. Accessed November 2005 at http://www.greenhybrid.com/compare/mileage/.
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