At $4/gallon a hybrid may not make financial sense:
The following guest post is from Tim Chen. Tim is the CEO of NerdWallet, a credit card website that helps consumers find the best cash back credit cards for their spending habits.
Editor’s Note: As has been pointed out in the comments below, I believe Tim made a mistake in citing 40,000 as the average number of miles driven in a year. That number is more likely to be in the 15,000 mile range.
Editor’s Note: As has been pointed out in the comments below, I believe Tim made a mistake in citing 40,000 as the average number of miles driven in a year. That number is more likely to be in the 15,000 mile range.
People have remarkably short memories when it comes to price changes. Retailers can attest to how quickly shoppers perceive sale prices as baselines, while a price increase must be sustained for quite some time before consumers shift their spending habits.
But the current rise in gas prices reawakened the memories of similar spikes in 2008 and has Americans considering long-term adaptations in addition to quick fixes like simply driving less.
Instead of opting for low-mileage giants that bear a strong resemblance to army tanks, many car buyers are considering hybrids instead. Soaring gas prices, combined with anticipated shortages following the March 11thearthquake and tsunami in Japan, lifted demand just as production interruptions began to reverberate in America.
Car dealers see their hybrids flying off the lot, while selling used Priuses has become so lucrative that Toyota of Hollywood paid its employees a $500 finder’s fee for every Prius brought in.
Given the spike in Prius prices – used models sold for 30% more than the beginning of this year according to the National Automobile Dealers Association – and the admittedly fickle nature of gas prices, is a hybrid car still a solid investment?
New Prius vs. New Jetta
The Kelly Blue Book puts the fair purchase price of a 2011 Prius at $23,300, while that of a 2011 Volkswagen 4-door Jetta is $15,500. The Prius gets about 50 miles per gallon for both city and highway, while the Jetta gets 25 and 34mpg, respectively.
Setting aside the abstract benefits of owning a Prius, from saving the environment to establishing save-the-environment street cred, how long would it take to make up for the Prius premium?
We calculated the amount a consumer would spend on gas in a given year for different amounts of driving. By subtracting the amount spent with a Prius from that spent with a Jetta, we find the yearly savings on gas achieved with the hybrid.
Target: $7,800
Assumptions: Gas costs $4 a gallon, driving is split between city and highway
| Miles Driven per Year | 20,000 | 40,000 (national average) | 60,000 | 80,000 |
| Gas Savings per Year | $1,112 | $2,224 | $3,336 | $4,447 |
| Years to Reach Target | 7 | 3.5 | 2 | 1.75 |
In order to make up for the Prius’ cost, the average American would have to hold the car for 3.5 years. Drivers keep their cars for just that long on average, so a Prius won’t save the typical driver any money even with the generous assumption that gas prices remain high throughout.
Used Prius vs. Used Jetta
Now we’ll compare the advantages of purchasing a 2006 Prius and Jetta, both with 200,000 miles, from a dealer. KBB puts the suggested retail price of the Prius at $11,500 and the Jetta at $8,000. Using the same assumptions as above, how long will it take to earn back the used Prius markup? The fuel efficiency of both cars is slightly lower: 48mpg in the city and 45 on the highway for the Prius, and 19 and 28mpg for the Jetta.
Target: $3,500
| Miles Driven per Year | 20,000 | 40,000 (national average) | 60,000 | 80,000 |
| Gas Savings per Year | $1,804 | $3,609 | $5,413 | $7,217 |
| Years to Break Even | 1.7 | 0.8 | 0.6 | 0.4 |
The savings on gas are realized much sooner with a used Prius than a new one, which may, in part, explain Toyota of Hollywood’s juicy finder’s fee. Assisted by a larger absolute decline in price and comparatively better fuel efficiency, the used Prius easily beats out the used Jetta within a year.
Other ways to save on gas
Buying a car simply to cut down on gas spending doesn’t make financial sense, so consumers who don’t plan to trade in their vehicles in the near future will have to find other ways to cope with high gas prices. Despite rising fares and schedule cuts, public transportation remains a viable option.
Gas credit cards and customer loyalty programs can shave off a few cents per gallon, and some gas stations charge lower prices for cash payments. Such strategies can help to ride out temporarily high gas prices without the significant cost of a new hybrid.
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