Is Cash For Clunkers Worth The Trouble?

Cash for Clunkers program got off to a bang last week but interest has cooled off considerably, according to Edmunds.com, a car-shopping website.

In case you are unaware of the Cash for Clunkers program, here is a quick summary. The clunker rules state that if you trade a vehicle with a fuel economy of 18 mpg or less for a vehicle which is at least 4 mpg higher, you’ll get a government rebate to use toward the purchase.

More specifically, if the new car gets at least 10 mpg more than your old one, the rebate is $4,500. If it is between 4-10mpg, you qualify only for $3500.

You can check your clunker's mpg at the official Cash for Clunkers Web site which will link you to the Fueleconomy.gov site.

Before we explore the inadequacies of Cash for Clunkers, some credit must be given to the Obama administration for boosting the sluggish automotive industry. After all, two major scalps (General Motors and Chrylser) have already been claimed in this recession.

Notwithstanding the much-touted green shoots, the automotive industry continues to suffer from excess inventory due to overproduction and lacklustre demand.

Speaking of demand, I doubt it is not going to recover soon when consumers are still caught in the triple whammy of job insecurity, stagnant wages and restrictive bank credit. The specter of high fuel costs has also deterred most people from upgrading their vehicles.

External stimulus like Cash for Clunkers will entice people to buy cars by trading in their old, fuel inefficient clunkers. That will also free up inventories and spur production again.

To be sure, a new car is more comfortable and creates less emissions and maintenance problems than an old one. It is also much safer with advanced lifesaving electronic stability control and side-curtain airbags.

However, Uncle Sam’s rebate program is crafted in such a manner that not all clunker owners qualify or find the terms attractive enough to trade in. Older cars that are not worth much and get poor gas mileage stand to benefit most from the government rebates.

Here are more catches in the Cash for Clunkers program:

1. Your clunker must be less than 25 years old.
2. The vehicle must be be road-ready with at least 1 year insurance history in your name.
3. You must buy a new car, not used.
4. The manufacturer’s suggested retail price (MSRP) of the vehicle you buy can’t exceed $45,000.
5. If you want to lease instead of buying a new car, the contract must be at least five years.

Frankly speaking, I prefer taking cash to getting rebates. However, Uncle Sam does not want to mail us the cheque. Instead, when you trade in your clunker, the car dealer will just apply the credit toward your purchase price, send your clunker to the scrap yard, and get reimbursed by the government.

If we aren’t careful, at least part of the rebate could be lost during the negotiations for the new vehicle. A sleek salesman is likely to jack up his price or forgo the in-house discounts when they realize that you are trading in your clunker.

There is also a good chance you can extract a better deal by selling your clunker in the open market. Many old cars have higher trade-in values than the $4,500 or $3,500 rebates. You lose out when you don't comparison shop around for the best market prices.

With the atuomotive industry in doldrums, it’s a buyer’s market out there. Customers command a lot of leverage in the auto showroom, even without the government rebates. Since we call the shots, do not rush to trade in the vintage clunkers without doing some research.