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In an effort to stimulate the wallets of car makers and dealerships, congress passed ‘Cash for Clunkers’.  ‘Cash for Clunkers’ will give between 3500 and 4500 toward the purcahse of a new vehicle. Qualification for ‘Cash for Clunkers’ is based on the age of your trade in vehicle, and its NEW EPA estimated combined fuel economy. Passenger cars must be 25 years old or newer, and get 18MPG or less according to the NEW EPA estimates. To qualify for the full ‘Cash for Clunkers’ credit, the new car must get 10MPG better than your old car. To prove you aren’t trying to game the system, ‘Cash for Clunkers’ requires that the vehicle be continuously registered and insured by YOU for the previous 12 months.  Note, there are slightly different rules if you’d like to purchase a truck.

What does this mean for the consumer? Time will tell, but I imagine the deep discounts being offered for the purchase of new cars will dwindle. The dealerships know ‘Cash for Clunkers’ will drive in new customers, and they know the customers will have at least 4500 to put towards a new car. Armed with this information, the dealerships may be able to raise their prices a little.

Is ‘Cash for Clunkers’ actually a good deal? It depends. Do you have a car that is essentially worthless? Is the replacement vehicle you are looking at a super economy car?

As an example, my  Toyota Camry gets 18MPG according to the EPA. It’s kind of falling apart (What can I say? Its paid for!) and wouldn’t fetch much on the open market….maybe $1200. If I were to buy a 2009 Nissan Versa for $7800 and use ‘cash for clunkers’ to trade in my Camry, the ‘Cash for Clunkers’ transaction would break down like this:

Stripped downVersa      +7800
‘Cash for clunkers’         -4500
Taxes & Registration     +800 (varies by state)
Total =                             4100

This is simplified, because it doesn’t take into account the current value of my car, the savings of gas, and any differences in insurance costs. Is 4100 a good deal on a new car with a warranty? (Reminder: my Camry has many expensive repairs needed regularly). I think its a great deal. But will the majority of americans buy a stripped down economy car with their ‘cash for clunkers’ money? I doubt it. Folks will want to drop at least 20K on a new car.

One thing I see as sorely lacking is the ability for consumers to purchase a used car with better gas mileage. Is the intent to incentivise better gas mileage, or is the intent to line the pockets of the auto industry?