Cash for Clunkers: Good, Bad or Ugly?

The Cash for Clunkers program was recently launched and at first sight it looks like a pretty good program but I am a bit skeptical. Let me run down the details for you and you let me know what you think.

Basically the program is sponsored by the government and you get a voucher for a certain amount of money to put towards a new vehicle when you allow your old “clunker” to be taken and destroyed or what the government is calling “deactivated” by the dealer. The amount of money you get depends on the gas mileage of your “clunker”.

Here are some of the details of the program:

  • Vehicle must be newer than 25 years old (the manufacture date, not the purchase date)
  • Vehicle must get 18 miles per gallon (city/highway average I believe) or less
  • Vehicle must be drivable
  • Must be insured and registered to the same owner for a full year prior to trade-in
  • The new vehicle being purchased must be less than $45,000
  • The vehicle MUST be new (08, 09, 2010), no used car purchases
  • Can be lease or purchase if lease is for at least 5 years
  • There are different regulations for work vehicles

How the program works is if you purchase a new car that gets at least 4 but less than 10 miles per gallon higher  than the “clunker” you get $3,500 towards the purchase of the new car. If the new car your purchase gets 10 miles per gallon higher than the “clunker”, you get $4,500 towards the purchase of the new car.

The credit can be combined with any dealer incentives such as “employee pricing” that was popular a few years age. The credit can also be combined with any other government incentives such as the hybrid vehicle credit.

There are other rules and more information you should read if you are considering this program so check out the official website here:

My take on all this

While free money is always great, this money comes with a catch. You have to buy a new car to get any of the money. New car prices can range from $10,000 (Kia anyone?) to three or four times that (obviously there are more expensive new cars, but to qualify for the credit they must be under $45,000). So do you have $10-$15 thousand dollars lying around as well as an older car that you have owned for over a year that you would like to trade in?

Some may say yes to this and I think if you were already planning to buy a new car then go for it, it’s great to get free money just for going forward with your plans. But I think the problem with all of this is that the government is trying to give us incentive to buy new cars. They are saying this is to help the environment and get rid of older cars on the road, but I think it also has something to do with creating a spending buzz and fixing the economy.

For that reason, I think it is a bad idea. If you haven’t been planning on buying a new car, but after hearing about the credit are now thinking it may be a good idea, think about this: It still costs money! If you don’t have the cash lying around, you will have to finance the purchase. That means getting in more debt.  Do you really need that debt?

Another thought that I found interesting is that the Kidney foundation that takes clunkers for free was worried at first about this program because it would take away from cars donated to them. Then after finding out how strict the Cash for Clunkers program is, they decided that many people that go in to buy a new car (and haven’t done their research) will find their old car doesn’t qualify, yet they will most likely buy a new car anyways and still have a clunker they need to get rid of.  So people that aren’t getting the free money but are already at a dealership are still highly likely to buy a new car! Thus creating more average debt for the nation. How will that help the economy?

Another quick point that may be argued is that the program is similar to the home buyers credit, but in reality people don’t need brand new cars and their value is far more volatile than a homes value in the long run.

So if you have been planning on buying a new car, now is certainly the right time to do that but if you haven’t been planning on it and were spurred by this new program, it may be in your best interest to do the math and figure out if it will really be worth it for you.

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5 People have left comments on this post

» J. MoneyNo Gravatar said: { Jul 29, 2009 - 06:07:34 }

Yeah, I can’t tell if I like this one or not either…but then again I’m all for trying something out so we’ll see what happens! I’m aching for a Benz one of these days, but my ’93 Caddy is holding up just fine and keeping me content so I don’t go and blow money to save money 😉 Good post.

Jesse MichelsenNo Gravatar Reply:

Yea, since it just launched we will have to wait and see what the general population feels and what outcome, good or bad arises from it. I know my post sounded vary biased…well, It is very biased…but one can never foresee the future. Maybe the air over LA will clear up, the stock market will gain faith and everything will be just peachy all from getting rid of old cars on the road.

I also think you hit the nail on the head, if you are content with your car, it still runs and gets you from A to B, save the money for something a little more important than an upgrade to an already functioning part of your life.

Thanks for stopping by J

» FEDUPNOWNo Gravatar said: { Aug 6, 2009 - 09:08:37 }

What is the CARS program going to do for me?, How about for Michigan?, What about the country. These are the questions flowing through my mind every time that I hear the subject brought up. This has become quite frequent, as you cannot turn on the TV, or open a newspaper, and not hear about it. The media and the government has claimed that this program is a great success. But I am worried about the long term effects.
I live in Michigan, and earn my living as a self-employed electrical engineer catering mostly to the automotive industry. As you could imagine, business right now is not so good. I have had plenty of time to get out and network, just looking to meet some new people in other industries. The hot topic right now is CARS, or cash for clunkers. I was intrigued with the difference of opinions as I speak with these people. I am torn with this topic. Having some insight into the workings of the auto industry, I can see the problems with this plan. However, my wallet desperately needs this plan to work, and I find myself trying to talk myself into it. One of the things that make this so difficult for me is that I can see the dollar signs, the CARS program is producing car sales in areas the industry is not accustom to. In order to meet the demand of these smaller cars, additional tooling will be required. This coupled with higher mileage requirements will create a massive re-tooling effort. This re-tooling will have an enormous effect on the Michigan economy. When the big three needs to they can move quickly. I have seen changes made to a model line fast-tracked and implemented with almost alarming speed. I am starting to see the activity here with respects to battery and hybrid components, and an increase in variable valving technology. The movement has begun, GM, and Chrysler now with fresh new credit will begin to re-tool for the “new” era of automobile manufacturing. I believe that this re-tooling will cause a boom-like surge in Michigan, giving the impression of a huge success for this program. Nothing better for Michigan than cars rolling off the dealers lot. It seems perfect…or is it? I remember being overjoyed when GM announced zero percent financing for the first time. It also seemed effective, cars rolled off the lot, and other manufacturers followed suit. What followed was a sales slump, and a used car market flush with nice choices. It took two years and a second wave of finance incentives to bring the new car sales numbers back. This time around, the mission is two-fold, stimulating sales is only one aspect, changing the type of cars that we drive is the other focus. My fear is that once the government incentives are gone, dealers will be left with lots full of cars that might not appeal to buyers without heavy discounting, or manufacturers incentives. We will be right back to where we were late last year. The slump following this program will be severe, and will require further gimmicks to bring people back to the dealers lot. I am now faced with the new thought. Can I get my ducks in a row, and be able to retire or re-position myself before the boom is over? I am excited about the level of work that will be coming this way, but know it will be short lived.

» Financial bondageNo Gravatar said: { Jul 10, 2010 - 02:07:43 }

total waste of time and money. That's the feds for you.

jmichelsenNo Gravatar Reply:

It's funny, I still see this advertised even though I believe the funding has stopped for the program. Car dealerships will do just about anything to get you on the lot 🙂

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