Financing a Hybrid Vehicle

When I discussed my car requirements, I mentioned I'm not interested in gas mileage because I only drive ~3200mi/yr. This provoked an interesting but more general question about when it does or does not make financial sense to get a hybrid vehicle.

The answer turns on the details, so I decided to answer the question by creating a simple spreadsheet so anyone can play with the numbers to fill in what's appropriate for themselves.

The following numbers are relevant:

• How many "city" miles you drive annually
• How many "highway" miles you drive annually
• The interest rate and duration on an automobile loan
• The interest rate on savings
• The price of gasoline
• The prices of two vehicles (one hybrid, one regular)
• City and highway mileage for each vehicle

I filled out the spreadsheet with some reasonable figures for myself:

• I estimated my ~3200mi/yr breaks down into 2000 city, 1200 highway.
• I looked at bankrate.com's auto loan averages and selected a 36-month loan at 5.91%, and also found savings account rates at 2.10%.
• I used a gasoline price of $2.439/gal, from the receipt of my last purchase.
• I compared the 2005 Honda Accord Hybrid (MSRP $30140, mileage 29/37 cty/hwy) and the 2005 Honda Accord EX V6 (MSRP $26850, mileage 21/30 cty/hwy). This pits the basic hybrid against the most expensive and least fuel-efficient regular vehicle, maximizing the benefits of the hybrid. (I used the trim levels without the satellite navigation system.)

The spreadsheet asks for the amount you're financing on each vehicle, which for simplicity I set equal to the MSRP (no haggling and 100% financing). The spreadsheet does not incorporate any tax incentives for hybrids, or differences in maintenance costs, etc. It's a simplification.

The spreadsheet assumes you could afford either vehicle, and places the difference in monthly expenditures in a savings account to earn interest. Use the Savings Account Balance column to compare the hybrid vs. regular vehicle purchase. When it's positive (black), the regular vehicle is less expensive. When it's negative (red), the hybrid vehicle is less expensive.

In my case, by the time the loan is paid off, the savings account's interest payments are almost equal to the fuel costs, so it would take longer than the hybrid's useful lifespan for it to be financially appropriate for me.

If I drove substantially more (10,000 instead of 1,200 highway miles per year) and the price of gasoline rose to $10/gal, the hybrid would become economical for me in just over 4 years.

Play with the spreadsheet. See for yourself how difficult it is for the lower spending on fuel to overcome the higher initial price of the vehicle. It's interactive. It's fun.

UPDATE 2005-05-11 20:02:20 UTC: I originally screwed up the auto loan interest. Sorry. It's fixed now, and I've changed the above comments.

UPDATE 2005-05-12 01:16:57 UTC: Brian writes on the subject of maintenance:

There are far fewer places that can service a hybrid. Assume this means much higher maintenance costs any time the engine or hybrid mechanisms need service.

The hybrid batteries have a short life span. Plan on spending $3k every 5 years for a replacement. I'd also plan on seeing a progressive decrease in hybrid efficiency as battery capacity declines, but I couldn't estimate how significant the effect will be.

On top of this, hybrids are too new to know the long-term maintenance implications. The regenerative braking mechanisms or any of a dozen other parts could turn out to be less "permanent" than the engineers thought, and replacement parts for vehicles being produced in low-volume are often impossible to come by in 8 or 10 years. The parts in question could be completely redesigned in later models to boost reliability, and there's no guarantee that the new parts would be compatible with the older model vehicles.

Thanks!