Friends around us know that we’re recently in the market of a car. And as we weighed our needs and the options in the market, we are looking at the Toyota RAV4.
When it comes to Toyota, there is one very common question — is hybrid worth it? As we did our research, we went from Yea it’s a no-brainer to Actually, it’s not exactly worth it… But something just never quite clicked with my money spidersense that I acquired from my Accounting 101 foundation.
Then it finally hit me: all the bloggers and YouTubers and columnists — even in a popular article from Globe and Mail1 — simply handled the math wrong.
Here’s how they do the calculation: MSRP2 delta on the hybrid car, divided by per-year savings on gas, equals how many years to break even on the hybrid premium. It’s not a wrong method per se, but they all left out one important part of the equation!
Everyone knows they pay more for a hybrid car. What they forget is that the hybrid car also sells for more. Your cost to own the car isn’t just what you pay upfront; it’s what you pay today minus what you might sell years later, or the depreciation.
In the case of the Toyota RAV4, the 2020 XLE trim has a delta of C$1,560, hybrid vs. non-hybrid. If you get rid of it in 6 years3 at 55% of its MSRP4, the extra depreciation over the 6 years is simply C$1,560 × (100% - 55%) / 6 = C$117 per year. Assuming the RAV4’s mileage applies with 50-50 city-highway mix (8.0 Litre / 100 km for non-hybrid, 6.0 Litre / 100 km for hybrid), and that the gas price is C$1.20 / Litre5 (a generous estimate for B.C.), you can expect to break even if you drive more than $117 / [$C1.20 / Litre] × [(8.0 - 6.0) Litre / 100 km] = 4,875 km per year, which is an extremely low threshold. From this base scenario, you can probably derive something closer to your case:
For other Canadian cities where gas is cheaper (maybe $1.00 / Litre), you are still looking at a very low break-even threshold of less than 6,000 km per year.
C$1.00 / Litre is approximately US$3.45 / gallon; so for our lucky neighbours in the south who get even cheaper gas prices, your break-even mileage may rise to around 7,200 – 8,400 km (or 4,500 – 5,250 miles) per year.
If you are looking to resell after less than 6 years, you may need to drive more per year to break even. This is because any car depreciates faster in its initial years. A reasonable schedule would be —
If you own for less than 6 years, your break-even mileage is higher. But even in the extreme scenario where you sell after one year, your break-even mileage is 10,000 km — not exactly a high mark to hit.
Thanks to Toyota’s manufacturing, the hybrid premium is significantly lower than other brands. Honda and Nissan easily have a C$4,500 difference on the hybrid models vs. non-hybrid. Your break-even mileage will be significantly impacted by the delta on MSRP, which drives up your annual delta on depreciation.
And thanks to Toyota’s branding, your car doesn’t depreciate as much in early years. If you are buying new from Honda or Nissan or Mazda, and plan to sell in just a few years, your break-even mileage is driven higher because they lose value much faster in initial years6.
To mitigate that, just don’t buy a new Nissan or Honda. :-)
The RAV4 non-hybrid has a FWD (front-wheel drive) tier, while the hybrid starts with AWD (all-wheel drive). It might make more sense if you are already OK with FWD — it’s just not the case for me.
Back to the question — is hybrid worth it? For the RAV4, yes it is — as long as you are driving at least 5,000 – 10,000 km a year or more.
Contrary to what the bloggers and columnists are trying to tell you, the hybrid car earns you money even from the first year — if you drive more than 10,000 km. The money you save since the first year is probably a lot more than the extra depreciation.
MSPR: Manufacture’s Suggested Retail Price ↩
Or for our friends in the south of the border, about US$4.10 per gallon. Chances are you have way lower gas prices than anywhere in Canada :-) ↩