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?
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."