Buying a New Hybrid to Save on Gas: Smart Move or Financial Folly

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.

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 11th earthquake 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.

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.

Comments

  1. Great post. Thanks for sharing this. While deciding to purchase a car for our growing family last year, we also weighed the benefits of new vs. Used and conventional vs. Hybrid. We purchased a new 2010 Subaru Forester because it best met our needs (AWD, cargo, safety, family friendly). Based on our driving habits and expected gas prices, we could not justify the $7,000 hybrid premium for the Ford Escape.

    The Forester has worked very well for us. We see more Foresters in our small town, too (and plenty of Priuses).

    PS we used game theory to buy the Forester and save $3,000. I’d be happy to share the story if you would like.

  2. First, the US national average miles driven is 15,000. Assuming the person buying these cars is concerned about the environment, they will likely drive fewer miles than the average and will keep their car longer. Combine this with the premium on tires and the eventual battery change not to mention that a Volkswagon is a rather expensive car to own relative to other options and the Prius purchase looks even worse. Although I did not do the calcs for used cars, when I did the calcs a few years ago, you would just about break even between a new Prius and a new basic 4 door box over a 200,000 mile life IF gas was $6. Shorter ownership made things worse. I can’t imagine anything has changed. Comparing a used basic 4 door to a used Prius made the calculations even worse.

  3. 40,000 miles per year, average!? That seems really, really high. The *average* person drives 40kmi per year, or nearly 800 miles per week? Over 100 miles per day? This seems unlikely. I would guess that the average car owner drives 15,000 miles per year or less. 50kmi per year is within the realm of the professional salesman! It would take alot longer to pay off the Prius on gas savings alone, considering very few drive as much as this table indicates.

  4. Where did you get your average mileage numbers? They’re way off. I believe that average mileage for the US is 12k-15k/yr. Its certainly not 40k. Buying a Hybrid is definitly not worth it just to save on gas.

  5. It is funny when you compare and contrast cost versus gas prices. It is nice to have something that gets good gas mileage but if you have to pay through the nose to purchase the product it may not payoff. Gret food for thought.

    • There are two batteries in the Prius.

      The starter battery is a small lead acid battery. It lasts about the same as other lead acid batteries, and costs about the same to replace. But it’s small, though, so you can run it down more easily than a lot of other starter batteries.

      The traction battery is probably the one you’re wondering about. Our Prius has 126k miles on it, and it’s going strong. Most people in the Prius technical community seem to think they normally last to around 200k miles. Last I heard, used batteries cost around $1300, and new ones cost around $3300. About like a transmission in a normal car, really. The mechanical transmission in the Prius (the “power split device”) is much simpler than the transmission in a normal car and I haven’t heard one one wearing out yet.

      Our Prius has been a great little car. The fuel savings are great, but it’s also been one of the most reliable cars I’ve ever owned. And the interior space is very well used, so it’s far more useful than a sedan and it hauls car seats pretty well. Overall, the Prius really is a sensible little car — and if you’re in the market for a new car, it’d be hard to go wrong with it when you consider the whole package. If you’re in the market for a used car, though, the Prius holds it’s value so I would recommend something.

      BTW, our 126k-mile Prius still feels new to me…!

  6. Maybe 40k is the yearly average for someone with a long commute? Hoping Tim will chime in here at some point.

    Still, the point holds true that it seems silly to buy a new hybrid to save money on gas. Sure, there may be some environmental advantages (though I wonder if shortened battery life and their manufacturing and disposal doesn’t negate some of that), but from a purely financial perspective, it’s hard to make the numbers work.

  7. This analysis will be different for each circumstance, but it is absurd to purchase a new vehicle solely for fuel savings. I question 40,000 miles per year as a national average for passenger cars, plausible if heavy trucks are included.

  8. There was a “Dust to Dust” study done a few years ago (though I think their findings are in question) that compared the entire lifecycle of many vehicles, from hybrids, to SUVs, to luxury sedans. The hybrids scored poorly, often faring worse than the SUVs and luxury vehicles.

    Whether their findings are correct or not, I think we should take the same “consider every angle” approach, especially if environmental responsibility is our goal. If low fuel consumption is the aim, then a hybrid still might not be the best answer. My wife’s 09 Honda Fit averages 38MPG (according to the on-board computer).

    I think, unless you are in need of a new vehicle, you should focus more on keeping your current vehicle properly maintained to eke out all the mileage you can. Pay special attention to your tire pressures — it can make a noticeable difference in fuel mileage.

    • That study was bunk. It assumed that the SUVs last 300k miles, and hybrids last 50k miles.

      So far, the Prius in my driveway has bested 126k miles without a major service, while my Ranger (same platform as the Explorer) has made it to 189k miles with a number of major repairs (ball joints, clutch, two timing belts, alternator, A/C compressor, power steering pump), the first cluster of which occurred around 100k miles. The Ranger will probably need a transmission some time after it passes 200k miles. I haven’t had enough parts fail on the Prius yet to be able to predict the car’s overall life — it’s that reliable… :-)

      So far, the dust-to-dust analysis is looking like a tie at worst, but the Prius may have an edge.

  9. Your 40k number is way off. I drive 60 miles to and from work, and I only put on 15k per year. You’re saying the average person drives more than that to work, which would end up being an hour drive each way! Also, it’s almost impossible to put 200,000 miles on a 5 year old vehicle.

    Outside of those rediculous numbers though, you don’t need a hybrid to get better gas mileage. I actually just wrote about why I bought a third car to save money on gas. I got a 1997 Honda Civic with 186k miles on it for a cheap price. That is a deal that makes way more sense than buying a new hybrid.

  10. A very important part of this analysis is missing: maintenance.

    The Jetta will be in the shop numerous times per year – they are notorious for breaking down both mechanically and electronically.

    The Prius will need a new battery eventually and from what i’ve read, these aren’t cheap.

    I do like this analysis (though the average miles is a bit crazy! We drive about 10,000 – if that) but it is incomplete. True cost of ownership takes a lot more into account than just fuel.

  11. I think a better comparison would be Corolla to Prius. It negates some of the quality issues and the Corolla can get mid-upper 30s mpg combined if you’re good with a stick shift.

    Just want to confirm that the environmental impact of manufacturing and later disposing of all those NiMH batteries is hardly negligible. They’re better than NiCd, but the difference is relative. Whether this is “better” or “worse” than the extra impact of burning gasoline will depend on how you define “environmental impact” and weigh all the factors.

  12. Really? I don’t know what nation drives an average of 40K a year but the US average is 13,476 according to the United States Department of Transportation – Federal Highway Administration.
    It will take 10 years of gas savings to recoup the $7800 price difference you quote for new and 3 years for the $3500 difference on used.
    Ultra high mileage cars are great for the environment but the price difference is not easily recovered in fuel savings given real driving conditions.

  13. Thanks for crunching the numbers like this. I’ve been thinking about making a similar move, and now you’ve convinced me that my best bet is to stay with my trusty, old, and well-loved Malibu.

  14. If you already own a Prius, how high do used prices have to go to make it worth selling your car and buying a different one?

  15. The EPA studies included all vehicles including older ones with very few miles driven per year. I think a reasonable range for the average “main” car per houshold would be between 15k and 20k.

    Not sure why people are getting so bent over the misleading average numbers anyway. Plug your own numbers in and decide for yourselves.

  16. Setting aside the 40k for a second, and the upkeep, what about the financing (if necessary)? What If i needed to borrow that $7800? What if I could afford it and invested the difference? What about the long term trade in value? Too many questions, so few answers.

  17. Jason, why don’t you ask Trent at TSD to give you the cost of ownership for his prius. He has had it for some years now and could provide numbers to back up or refute this post. He should be able to provide total cost including gas, insurance and maint. with the purchace price to give you a cost per year breakdown.

  18. There are studies being done that show a hybrid or electric car actually are more environmentally unfriendly to produce given what current has to be mined to create the batteries. The question of what to do with millions of used batteries also doesn’t appear to have been addressed yet. In the cost comparison I would assume a hybrid w/ 200,000 miles would be very close to needing a new set of batteries – that has to be very expensive – wish I had the reference – but read something recently that indicated you could rebuild an engine 3+ times for what a new set of batteries would cost.

    I will have to purchase 2 cars when I move back from overseas in early 2012 and don’t think I will even consider a hybrid for many of reasons posted in comments here. Hoping the used care market is ripe with good deals, but will see when we get back. Cars are too expensive in Singapore for me to justify – so it is public transport and taxis for me now. It is liberating to not own a vehicle – along w/ some frustration, but where I live in NC not having a vehicle is not an option.

    Stay frugal

    Bill

  19. Between Jetta and Prius I definitely choose my bicycle. For the last 9 months, my bike has been my vehicle of election.
    It´s completely green, fast and economic.
    Worried about the prices of the oil? Worried about the prices of gas? Or maybe the price of electricity??

    I don´t…

  20. I wouldn’t buy a used car with 200,000 miles on it either way.

    But there’s no way I’d trade my paid-off, small SUV (22-24 mpg avg) for a hybrid. I hope to drive it for another 10 years for just gas and maintenance costs (I have only 55K miles on it). If I had to buy another car, I would buy a fuel efficient, non-hybrid model.

  21. Who drives 80K miles/year?

    I drive 5K and plan on having my car forever. But yeah, I’ll probably buy a hybrid when it hits 200K miles. But that will not be for another decade or more.

  22. I was under the impression that the average mileage driven per year for a passenger vehicle was between 10K and 15K. In fact, the EPA reports the average is 12K. “The number of miles driven per year is assumed to be 12,000 miles for all passenger vehicles.” ( http://www.epa.gov/otaq/climate/420f05004.htm ) and the Federal Highway administration has averages per age group ( http://www.fhwa.dot.gov/ohim/onh00/bar8.htm ) which barely go above 15K for any age group. These rates are well below any calculation listed above, and thus would make the car not financially sound unless you were a traveling salesman / businessman of some sort.

  23. Even the Ford C-max compact minivan – which holds up to seven passengers – is smaller in size to help give it the label of fuel efficient…Hybrid and electric vehicles were also in the spotlight – ranging from the Toyota Prius models to the Nisson Leaf and Volvos C30.

  24. The national average is not 40000. It is closer to 18000. You don’t discuss particulate matter (part of smog) that is reduced.

  25. It is nice that this article has made more people aware of how to do the calculations.

    For truly frugal people, the comparison might be a bit different, however. You’d be comparing a 2004-2005 Prius with, say, 90k miles and a street price of $8000 or so before the currently Tsunami-inspired price spike. (I have been watching prices for months), to another roomy 4-door hatchback car with a large cargo area and room for 5 adults.

    First of all, there aren’t many fuel-efficient 4-door hatchbacks or wagons out there, especially from top-quality car companies – for example, there are no other recent Toyota or Honda small wagons. This makes the Prius a top choice for bike/outdoor/dog enthusiasts.

    So you are comparing an $8000 wagon to things like the Subaru Legacy, Honda fit, Jetta wagon – which are not much cheaper for similar age and mileage. Battery life in the Prius is not an issue, they are designed to last the life of the car and the replacement cost is dropping every month anyway ($1k-$2k according to prius forums).

    Plus, you can pay a company like evolveelectrics.com to modify your Prius to do local errands in plug-in-all-electric mode with a second battery pack, resulting in even higher fuel savings.

    Even with my own driving of less than 10k/year for a family, these calculations point me towards a Prius for my own next car. Unfortunately, I’m currently driving a 2005 Scion, which will probably last at least another 10 years before this option comes up.

  26. I think there’s a fundamental flaw with the way hybrids are compared to gas cars, making them look worse than they really are; and it’s typically based on the way “average” mileage is calculated. Simply saying “driving is split between city and highway” does not make for an accurate comparison.
    Hybrids, by their very nature, use much less gas during city driving than on highways, and the MPG will actually be higher. In fact, when the car is stopped, it uses NO gas at all (the engine shuts off). When you’re driving on the highway, the battery doesn’t come into play at all, and you’re basically driving a standard car. So if you’re going to compare a hybrid to a gas car based solely on picking numbers of miles driven, you’re not going to get a real comparison.
    The bottom line: if you do a lot of stop-and-go driving, with very little highway, you’ll do much better with a hybrid. If you drive a lot of miles per year, it stands to reason you’re driving a lot of highways, so hybrids are not going to make sense.

    • “Hybrids, by their very nature, use much less gas during city driving than on highways, and the MPG will actually be higher. ”

      As an owner of hybrid with an interest in science, I have to point out that you’re misrepresenting what the hybrid system does.

      Hybrids do not get better mileage in stop-and-go traffic than they do at steady speeds. A Prius driving at a steady 35mph will get far better mileage than a Prius stopping and going on a road with a 35mph speed limit.

      What the hybrid system does is recover a fraction of the energy lost in braking (and it can only be a fraction, because energy can not be created out of thin air), and apply that to accelerating at the stop. In other words, the efficiency of all cars is lousy in stop-and-go traffic, but the hybrids are less lousy.

      You are correct when you point out the hybrid system doesn’t do much for efficiency on the highway. However, our (well-worn and paid off) Prius got 49mpg on tank after tank of gasoline on our way home from vacation last night. The reason for this is because Toyota started with a car that would get excellent mileage, and THEN they put a hybrid drivetrain in it. If they’d started with a vehicle that gets lousy mileage (like a Chevy Tahoe) and put a hybrid in it, then it would still get lousy highway mileage. But, Toyota designed every aspect of the Prius to be a practical and efficient little car, and they actually hit the nail on the head.

      The Prius is practical and efficient, but it isn’t much else.

      • Summary:
        The Prius gets better gas mileage highway than anything else, because it’s an efficient car through-and-through.

        But other hybrids can be hit-or-miss when it comes to highway gas mileage.

      • “In other words, the efficiency of all cars is lousy in stop-and-go traffic, but the hybrids are less lousy.”

        I know, and I agree with you. But I think you’re missing my point. The hybrid system is there to save fuel when you least need it (when you’re stopped). At highway speeds, there’s no benefit to a hybrid, so that type of driver shouldn’t even be trying to run the numbers. My main issue was with the assumption of “driving is split between city and highway.”
        My point was that the decision to buy a Prius should not to be based simply on an average MPG. It should be geared toward the stop-and-go commuter because your money savings will be more significant, and the payback period will be better for that driver than the numbers represented in the article.

        • But, the Prius gets better gas mileage in the city and on the highway than other cars. The 49.0MPG that I reported was not a combined average, that’s what I actually got driving over several hundred miles on the highway last night running 70-75mph with a fully loaded vehicle in the real world. The sticker in the window does not lie about highway mileage.

          If you want to debate the philosophical point, I concede that the hybrid system in my Prius isn’t what was saving most of the fuel last night. Having the hybrid system in the car sure isn’t hurting the highway mileage, though, so I don’t see how your theory about “you shouldn’t drive a hybrid if you drive on the highway” applies. The Prius uses half of the fuel on the highway as most conventional cars, and it even beats the Jetta TDI.

          There are many reasons to choose another vehicle over the Prius for highway duty, but they’re not what you think they are. First off, the Prius is a small lightweight car. If you need to haul lots of stuff, or lots of people, it’s just not the right tool for the job. Also, it’s light weight and laminar-flow windshield mean that you have to slow down more in the rain than most other vehicles. Also, it’s a short-wheelbase vehicle with a tight turning radius, so steering at 80mph requires a light touch. And the seats are competent, but not luxurious. The Prius is competent in every category, but it’s only exceptional when it comes to practicality and efficiency. There are many vehicles out there that are more comfortable to sit in for hours on end, or take marginally less attention to drive on the highway. If you live on the highway, I can see why you might prefer something other than the Prius for capabilities, creature comforts, or high-speed handling.

          However, your hypothesis about hybrids being disadvantaged on the highway just doesn’t match my experience driving an actual Prius in the real world. Seriously, you can’t argue with 49MPG observed actual highway mileage at sustained high speed on a car with 130k miles on it.

  27. I’ve also owned both a VW Jetta TDI and a Prius.

    I’m surprised that this article mentions a low-end gasoline-powered VW Jetta and the Prius without also comparing the high-efficiency turbodiesel version of the Jetta.

    I owned a turbodiesel Jetta, and it got 40+MPG when being driven aggressively through the mountains, and I calculated that (given my lifestyle at the time), I would actually make up more than the cost of the payment on the monthly savings in fuel alone.

    But the maintenance on an out-of-warranty Volkswagen made it it the least frugal and least reliable car I’ve ever owned (and I’ve owned some real rattletraps), and so if anyone is comparing a Jetta to a Prius, the Prius wins on reliability alone.

    My wife has owned her Prius since it was new, which means that she/whe have owned and maintained it over 130k miles and 7 years. I’m not sure how much we’ve paid to maintain it over that time, but it’s only required the scheduled maintenance and wear-parts like tires. In other words, if you’re thinking about buying a Prius, you can look at the maintenance schedule, write down the prices, and you’ll know how much it’s gong to cost.

    I owned my Jetta for one year and 20k miles, and I spent over $7k to maintain it during that time. All of it was unscheduled maintenance for things like transmission failures (yes, multiple transmission failures), engine sensors, and so on.

    I wouldn’t recommend a Volkswagen product to anyone who reads a blog about frugality. As soon as the Volkswagen crosses the warranty-line (and possibly before), the Jetta will eat the hybrid premium in maintenance costs several times over. Oh, and the Prius will save you some money on gas, too.

    The Prius was definitely the car to keep our of the two. I miss my Jetta because it was fun to drive, but I can’t afford to own a Volkswagen product. I can afford to own a new or used Toyota or a Honda, and I could probably give up a few things in my budget to own a Lexus if I really wanted to. But I can’t afford to own a Volkswagen.

  28. $1,326.00 (based on an estimated 100 mile charge at a cost of $2.75 per charge times 365 days of the year) is the average difference of the EXTENDED costs of fuel for a hybrid vs a regular gas fed car. As we know, electricity prices are sky rocketing as the Administration and EPA impose more taxes and other fees to the cost of electricity to the average home. In addition, what people aren’t seeing is that we really AREN’T helping the environment by buying Hybrids. Let me explain why. We receive our electricity in our homes in various ways, mostly through coal, nuclear and petroleum sources. So to supply that extra electric to charge these cars, actually increases pollution in the long run because you have to burn regular fuels in order to generate the electricity (that no one wants to add to the fuel costs on these cars because it isn’t ‘PC’ to do so) That negates the whole ‘Planet’ saving idea in a nutshell!
    In addition, when it comes to disposing of the batteries in these cars, there is NO recycle program set up yet! With the 2004 hybrid batteries just now hitting the recycle stage, with more expected each year, what does THAT say about polluting our planet?
    So, add the extra costs of these cars in purchase dollars, the additional costs of the electric used to propel them (for very short distances of 50 miles a battery Avg.) and what really is the difference? None! You are actually paying more for the ‘privilege’ to run a ‘supposedly’ (and extremely untrue) planet saving vehicle! Add to that the fact that the added pollution in terms of creating the extra electricity you need to run these vehicles as well as the fast approaching emergency of what to do about the inability to properly recycle the batteries, and you are actually adding MORE pollution to the environment then if you simply drove a reg. fueled car which has all of the pollution features required by law and is in proper working order.
    I love when the government and environmental agencies try and shove ‘new’ and ‘better’ ideas down the public’s throat. They will stoop to any available low in order to push their agenda and you can pretty much figure that it is generally full of lies and holes and will cost you more then the prior established. Wind farms are not only not feasible as a steady, reliable (they have to have wind so can’t be used in most areas of the country) energy source. Coal plants are our main source of electricity but with the Administration and Environmentalists influenced “war’ on coal is (closing coal plants at an alarming rate and consequently) driving up the price of coal causing electricity prices to soar around the country. If you are lucky enough to have energy supplied by a nuclear plant, that’s great, but the costs of building and maintenance of a nuclear plant are always offset by increased electricity rates for the consumers. Environmentalists claim that we all leave a carbon footprint which is detrimental to our planet. We leave less of a footprint today then they will admit and not much more then we have for thousands of years on this planet because of all of the environmental laws in effect today! So their idea that man is bad for earth and therefore has no right to walk on earth is absurd. People need to wake up, stop listening to governments, which are highly influenced by large business, lobbyists and their own pocketbooks, AND environmental groups with their inefficient, expensive and ridiculous ideas, and start using common sense. Google for facts and you will find them. Do your own homework and don’t rely on skewered ‘Government’ websites for your figures, because I guarantee that these sites stats ARE skewered…to meet someone else’s agenda and rob you of more money while making you feel ‘good’ about the robbery through misinformation, in the process.

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