CASH FOR CLUNKERS: IS IT FOR YOU?

by Joe Plemon on July 16, 2009

Car wreck
Creative Commons License photo credit: Matti Mattila

President Obama recently signed into law the “Cash for Clunkers” legislation, a bill intended to boost the sagging auto industry while rewarding people for purchasing more fuel efficient vehicles.

Here is how it works: you trade in your old car (it must be less than 25 years old, drivable and get less than 18 mpg) for a new car which must have a combined fuel economy of at least 22 mpg. New small trucks and SUVs must get at least 18 mpg while large trucks are required to achieve a minimum of 15 mpg. This program will cost $4 billion and will come from TARP.

How much cash will you get paid? Depending on how much you step up in your fuel economy (and several other factors), you will either get $3,500 or $4,500.

Cash For Clunkers Sounds Alluring Doesn’t It?

Herbie in a farmyard
Creative Commons License photo credit: Martyn Hutchby

But is the Cash for Clunkers program good for you? For most of you, I don’t think so. If you are planning to purchase a new car anyway and pay for it with cash, take advantage of this offer. However, if you are being tantalized by the government carrot, you need to stop and think. Here are a few thoughts to help you:

  • If you currently have no car payments, this program could move you back into car debt. I have a personal aversion (hatred) of debt, so I would save and pay cash for a great used car before taking on new debt. If you have to go into debt to get a great deal, it isn’t a great deal.
  • Trading with a dealer costs you money. Every transaction is different, but if you can sell your car yourself, you will get more for it than if you trade with a dealer. For example, the Kelly Blue Book (www.kbb.com) difference between Private Party value and Trade In value on my 1999 Cadillac is $1,500 but with Cash for Clunkers you don’t have the option of a Private Party sale. Each state is different, but in Illinois you can easily save another $1,000 in sales tax by buying a used car from an individual instead of a new car from a dealer.
  • The depreciation of a new car will eat up your Cash for Clunkers incentive. Remember: your new car is no longer new the moment you drive it from the show room floor. New cars depreciate about 60% in the first four years, so your $25,000 vehicle will lose about $15,000 in that four year time frame…over $300 a month. Even with the maximum government subsidy, your depreciation would cost you over $200 a month for those first four years.
  • If your goal is to improve your fuel efficiency, you can find many great fuel efficient used cars.
  • With anything, be wary of scams involving the Cash for Clunkers program.  The scammers are out there!

Can You Afford It?

In summary, buy what you can afford.  Jeff Rose from Good Financial Cents does a good rundown of the the tax rules of the Cash for Clunkers program. In addition,  ABC News Consumer Correspondent Elisabeth Leamy puts it like this:

“From a strictly consumer standpoint, the Cash for Clunkers program is not a good deal. Yes, if you are bent on buying brand new, you will save money. But the savings are nothing compared with how well you can do by buying a used car.”

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{ 4 comments… read them below or add one }

FFB July 16, 2009 at 7:09 am

It seems that there’s more benefit if you were already looking to get a new car. I guess we’ll see how much effect this program has to either stimulate the economy or help the environment.

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Peter July 16, 2009 at 7:33 am

I just can’t see how this program is going to be effective at it’s goals. From one report I read less than 5% of the cars on the road would even be eligible, and of those, an even smaller number were owned by people who would even consider buying a new car right now. The others were either happy with their old clunker, or are probably lower income and can’t afford a new car anyway.

Buy a used car, and make payments to yourself to buy your next one. You’ll save more money that way!

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Red Oscar July 17, 2009 at 6:24 am

Personally, I was looking forward to using my 1992 Acura with 170,000 miles as a trade-in under the CARS program. It truly is a clunker and will soon need nearly $1000 in maintenance work to keep running. But alas, it gets too high fuel mileage and does not qualify. I have the cash available so financing is not an issue. Still, I am pretty miffed about the rules of the program. I can only hope that in November the program get modified so I can participate. If not, I guess I will have the work done (replace timing belt before it breaks) and drive it for another 100,000 miles.

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One of the Few July 29, 2009 at 10:22 am

Reading through the comments I figure I drop an example of where the program worked out. I have a 2000 Mazda MPV with 272000 miles on it. It runs well but surely it’s at the end of it’s lifespan. Didn’t really think about getting rid of it because it’s worth less than 1000 bucks for sure (didn’t check). It has 18 mpg and qualifies for the program (ie registered,running,insured for past year. After searching for a replacement candidate the Mazda 5 was perfect for us. It’s smaller but still seats 6 and is classified as a mini van with 23 MPG. So i get the full 4500 plus any dealer incentives. My cost from the dealer was 19000 minus 4500 minus 2000 in loyalty and dealer incentives (marketing dollars not posted) = $12500. You can even finance that amount for 36 months at .9% – i am averse to debt but it was tempting. (i paid outright).

Yes you can find a used 3/4 year car for 12 grand, but it would be out of warrantee in this case and very hard to find a brand new dealer car for that much that seats 6. For me the deal seems to work.

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