By JLP | May 22, 2007
As gas prices rise, I’m sure there are lots of people thinking about trading in their gas-guzzling vehicle for a more fuel-efficient car. However, is that a good idea? Aside from environmental issues, if your current vehicle is paid off, does it make sense to purchase a new car just to save money on gas? If it doesn’t make sense at current gas prices, at what point will it make sense?
Hmmm… it’s quite the conundrum isn’t it?
I’m going to attempt to answer this question by conducting a little analysis. First we need some assumptions:
Let’s say you have a paid-off truck that gets 17 miles per gallon. You drive 15,000 miles per year. At $3.19 per gallon, you’re tired of spending $235 per month on gas (73.5 gallons per month × $3.19 = $234.56). Your friend tells you about how his Honda Civic is getting 38 miles per gallon and that although he drives the same distance as you do, he only spends $105 per month gas (32.9 gallons per month × $3.19 = $104.93) or $130 less per month than you spend. You start thinking to yourself that maybe it’s time to dump the truck and get yourself a Civic.
Let’s say your truck is worth $10,000 trade-in and a brand new Civic LX is around $20,000 including tags, title, and license, leaving $10,000 that will need to be financed. Payments on a 36 month loan at 6.5%, will run $306.49 per month. So, with gas at $3.19 per gallon, the net monthly cost of the Civic is $176.87 ($306.49 monthly payment – $129.62 gas savings = $176.87). The higher gas prices go, the more advantageous it is to buy the Civic. Of course, if gas prices fall, the opposite is true and the less attractive the Civic becomes.
Now, how high would gas prices have to go in order to fund the entire Honda Civic payment with the difference in fuel cost? Since we know that the Honda payment is going to be $306.49 per month and we know how many gallons of gas we consume each month, we can set up an equation to solve for the gas price:
T = Truck
C = Civic
PPG = Price Per Gallon
Setting it up algebraically, the equation becomes:
At $7.55 per gallon, you would be spending $554.60 per month on gas for the truck, while gas for the Civic would cost $248.11 per month for a difference of $306.49, which is equal to the Honda payment (all else being equal).
Like I said earlier, this does not take into account the environmental side of the equation which is hard to quantify. It also compares a Honda Civic with a full-size truck. There’s lots of people who drive trucks because they have to and a Civic just wouldn’t work for them. Still, there will always be people who will make the switch to a more fuel efficient car if gas prices get high enough.