With gas prices continuing to rise there has been an equal increase in the amount of marketing for new fuel efficient vehicles and hybrids. Some of these vehicles claim to have anywhere from 40 miles per gallon and above depending on your driving style. If you are in the market for a new (to you) car it can be tempting to buy a brand new super fuel efficient automobile. You get the new car smell with a smaller gas bill. But is that the best choice? Or would it be financially better to buy a used vehicle?
You might be surprised by the answer.
Photo by Honda
New Fuel Efficient Car vs Used Car?
This is not an easy yes or no question. You need to determine your driving habits and compare the cost of the gas you would save with the higher purchase price of the vehicle. To do that you need two vehicles to compare, a new fuel efficient vehicle and a typical used car.
For our purposes we’ll compare a 2012 Honda Civic Hybrid Sedan against its cousin a 2010 Honda Civic Sedan. The 2012 Civic Hybrid gets a combined 44 miles per gallon while the 2010 Civic gets just 29. That means the 2010 Civic only gets about 66% of the fuel efficiency of the Hybrid. Surely the Hybrid is the better choice, right?
Let’s compare using $3.84 as our price for a gallon of regular grade gas that both cars use.
Calculate Gas Cost Savings with New Vehicle
Let’s assume you drive 15,000 miles per year. The 2010 Hybrid will cost you $1,309 in gas in a year while the 2010 Civic is almost double at $1,986. That means if you maintain your current driving habits you will save $677 in gas costs every year.
Calculate Extra Cost of New Car Price
Looking online using Edmunds.com, the MSRP of the 2012 Civic Hybrid DX is $16,755, and a used 2010 Honda Civic DX will run you about 12,820 (before taxes and fees). That is a difference of about $4,000.
What is the Break-Even Point for the Fuel Efficient Vehicle?
Now we have our two needed sets of data for the fuel efficient vehicle:
- $677 in annual gas cost savings
- $4,000 in purchase price premium
The question now becomes if, or when, does the gas cost outweigh the premium in purchase price?
It’s easy: just divide $4,000 by $677. You’ll get a quotient of 5.9 years to break-even — the real time period is likely to be longer due to time value of money and the rising gas price. If you plan to own your car for 6 or more years, it is probably worth it to go with the newer, more fuel efficient car.
Other Data to Consider with Fuel Efficient Vehicles
This is obviously a very basic comparison, but hopefully you can use it to springboard into your own calculations.
Here are some other things you would need to consider:
- Sales tax on purchasing the vehicle (would be much smaller on used vehicle)
- Annual cost of registration (some states charge based on the value of the vehicle, so the new car would have higher registration costs each year)
- Repair costs (you might save money up front with the used vehicle, but repairs could eat up the savings)
- Insurance costs (newer cars, in general, are more expensive to insure than older vehicles)
Have you done this comparison recently? Which direction did you choose in the end?
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.