Rethinking the cost of hybrid cars

A lot of people get sticker shock when they look at the price of a new hybrid. They figure that the added expense won't pay itself back very quickly on fuel savings alone.

And in some cases they're right. Even with $4 gas, someone who drives 15,000 miles per year won't necessarily recoup those added costs in the first year of ownership. Depending on the non-hybrid car used for comparison, it may take two or more years before the gas savings alone equals the up-front premium for the hybrid.

But this quick analysis misses a number of hybrids' other economic benefits.

For starters, hybrids are holding their value better than non-hybrid cars. This means that, even if you don't recoup the extra cost of the hybrid in gas savings, you're likely to get more money out of the car when you decide to sell it.

In addition to resale, some lenders -- typically credit unions -- offer discounted loan rates for hybrids. And some insurance companies -- including Geico, the Travelers, and Farmers -- offer discounted premiums.

The federal government is also offering tax credits of up to $3,400 for hybrids -- but only for the first 60,000 vehicles, which means that Toyota and Honda models are no longer eligible. Some employers offer incentives for hybrid vehicles as well.

Testing the idea
Recently, Bryan put together a quick spreadsheet to calculate the "real" cost of owning a new hybrid versus another car.

In his calculations, he stacked up the Prius against the non-hybrid versions of Honda Accord and Civic, the cars he and his wife were looking at.

As you can see from the screen shot below, the Prius came out a winner.

Crunching the numbers
You can build a similar spreadsheet yourself by consulting a few resources and making a few assumptions.

Bryan, for instance, estimated the minimum number of years an person usually owns a vehicle (three), the average cost of gas (~$4.00), the number of miles someone might drive per year (12,500), standard maintenance costs, and how the purchase was financed.

If you're really particular, you may want to tack on extra cost such as the insurance premiums of owning a particular make and model car. You may also want to check and see if there are tax incentives from your state or the federal government for purchasing your particular model of hybrid.  

For the parts of the calculation you don't assume, here are a couple of links to get you on your way:

• Kelly Blue Book has average new car prices and resale values in your area. Models do tend to change from year to year, but assuming most features stay the same, you can estimate an average resale value for a car by looking at how old models are reselling. My colleague assumed he'd hold onto the new 2008 Prius, Accord, or Civic for at least three years, so he looked at resale values for 2005 models.
• Fueleconomy.gov has tons of data on average MPG of most cars. Your actual MPG will depend somewhat on driving habits, but the EPA stats will at least get you in the ballpark.
• E-loan should give you an idea about how much interest you'd have to pay to finance the purchase. Though, be sure to look around at your bank and local credit unions that may offer discounts for hybrids.

Noah Buhayar and Bryan Palmintier are fellows at Rocky Mountain Institute.