June 10, 2008

Should you switch to a more fuel efficient car?

Gas prices of over $4 gallon sure do make me wish I had a hybrid right now. My current car is a Toyota Camry that gets 20 city / 30 highway. Its not bad mileage but it would be nice to get 40 or 50 mpg instead. So would it make sense for me to trade in my current car for a newer more fuel efficient car?

Given the high cost of gas I'm sure many people are considering the same question. Its obvious that you'll save money by having a car with better fuel efficiency but will the lower fuel costs be enough to justify the cost? If you downgrade to a cheaper car then its simple to see that you'd end up paying less over all. But the most fuel efficient cars on the road nowadays are recent, more expensive hybrid models. SO lets look at whether or not it pays to upgrade to a more fuel efficient car..

TO figure this we'll need to know a few things:
Whats the trade in value of your current car?
What is the cost of the new car?
How long will you keep the new car?
How much do you drive per year?
What is the MPG efficiency of the current car and the new car?

For example, say I want to trade in my Camry for a New Prius. Say the Prius costs $20k and my Camry will fetch $10k trade in. My Camry gets 25mpg average and the Prius is at 50mpg and figure that I drive 15k miles a year and I expect to keep the car for 5 years.

Method 1: Cost versus gas savings
This is a very simplified method of comparing the additional cost of the car to the gas savings. If your gas savings exceed your annual costs to purchase then you'll save money with the more efficient car.

Your annual cost over the period you use the car is : (Cost - trade ) / years = cost/year
Your annual gas savings are: ($4 gallon * miles driven /old mpg) - ($4 * miles / new mpg) = gas savings / year

For my example figures we'd get:
My annual cost would be ($20k- 10k) / 5 years = $10k/5 = $2k /year
Gas savings : ($4 * 15k / 25) - ($4 * 15k / 50) = $2400 - $1200

The newer car would cost more than it saves in gas by this estimation.

Method 2 : compare TCO of both cars

You can look up the Total Cost to Own (TCO) of new cars at the Yahoo autos page and used cars at Edmonds used car research. TCO takes into account the fuel costs and the costs of financing. So if you're comparing one car to another than TCO will help you figure which is cheaper overall using MPG as a major component of the comparison.

To do the comparison you have to look up each car. WE find that a 2005 Toyota Camry XLE has a TCO of $34,728 and a 2007 Toyota Prius Base has TCO of $32,851. So by this comparison the Prius would be cheaper than the Camry.

You can use both of these methods to compare costs. If they agree on which option is cheaper then I think the choice is clear. But if the 2 methods differ and the difference isn't large (as in the examples above) then the choice is more on the borderline.

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