NorCalSavant

On June 24, 2009, President Obama signed the Consumer Assistance to Recycle and Save (CARS) Act of 2009.  It was actually included as Title XIII in HR 2346, the Supplemental Appropriations Bill for Iraq, Afghanistan, Pakistan and Pandemic Flu.  The full text of HR 2346 including Title XIII is available at this website.

The CARS Act provides consumers incentives to replace an old gas guzzler with a new fuel-efficient vehicle.  If you have a less than 25 years old car, and it was rated for less than 18 mpg when new, you can get a government voucher for $3,500 or $4,500 from the dealer towards the purchase of a new more fuel-efficient vehicle.  The $3,500 voucher applies when the mileage improvement is between 4 and 10 mpg.  The $4,500 voucher applies when the mileage improvement is more than 10 mpg.

Source: http://www.flickr.com/photos/mccaffry/3020832485/

The trade-in vehicle must be drivable, and be continuously insured and registered to the same owner for the full year preceding the trade-in to qualify for the payment.  So a working clunker is okay, but a dead clunker salvaged from the junkyard to claim the voucher will not work.  The dealer will be required to certify that the trade-in vehicle has been scrapped effectively taking it out of circulation.  The program is only available from July 1 through November 1.  However, National Highway Traffic Safety Administration (NHTSA) responsible for administering the program recommends waiting until July 23 when it will come out with the final rules and regulations for the program it calls the Car Allowance Rebate System (CARS).  The Act appropriates $1 billion for the program, which translates into approximately 250,000 vouchers or new car sales.

The details of the program are available here on this webpage.  The fuel economy ratings for the trade-in vehicle brands is available on this website.  There is a nice table showing the eligibility requirements for different vehicles here on this website.  Please note however that this table does not explicitly show the maximum allowable fuel efficiency for the trade-in vehicle to qualify.  For example, purchasing a new passenger car with 31 mpg with a trade-in passenger car with 20 mpg would not qualify for the program even though the mileage improvement is more than 10 mpg because the maximum allowable mpg for the trade-in vehicle is 18 mpg.

Source: http://www.cashforclunkers.org/edmunds-dealix-webinar-recap.html

Is the Program a Blockbuster in Waiting?

The program has its obvious flaws.  Those who keep and drive clunkers generally do not do it out of choice.  A new car costs anywhere from $15,000 to $20,000 at the least.  It also has higher insurance and registration costs.  Many clunker owners would not have the cash to pay for all the costs of a new car or the financial wherewithal to qualify for a new car loan, especially in this economy.  Those who could afford to pay for a new car with cash or financing, generally would not be the clunker owner/driver.  It is, therefore, unlikely that we are looking at a blockbuster program ahead of us.

Is it Worth It?

Just assume, hypothetically, that you are in good financial standing and you have a gas guzzler that you have been wanting to get rid of for a long time.  And, lo and behold, the government has just come out with the cash for clunkers program with its potential benefits to the consumer, the environment, and the auto manufacturer.  Who is it good for?

Assuming that you drive 15,000 miles per year and you go from a 18 mpg clunker to a 28 mpg shiny new fuel-efficient car, you will go from burning about 833 gallons of fuel per year to about 536 gallons of fuel per year.  That is a saving of about 297 gallons of fuel per year.  Assuming the average price of gas to be $3 per gallon, the cost savings are about $891 per year.  These savings continue for the life of the new vehicle.  However, for a realistic comparison, you should only count the savings for the period your clunker would have continued to operate without dying.

You also have to weigh in the registration, insurance, and repair and maintenance costs.  The registration and insurance costs for the new vehicle would definitely be much higher than those for the clunker.  The repair and maintenance costs for the new vehicle could be low in the initial years compared with those for the clunker car.  The financing costs could also be significantly higher for the new car assuming you finance your purchase, and the clunker was paid for.  The sales tax on the purchase of the new car would also be substantially higher.  However, fortunately the sales tax on the car is going to be tax-deductible this year.

In effect, you have to compare the total costs of ownership including registration, insurance, operating, and repair and maintenance costs for the clunker and the new car including the voucher benefit, for the period you were going to keep the clunker.  It is unlikely that purely financially you will come out ahead with the new car option.  However, if your clunker is only worth a couple of thousand dollars in trade-in value, and is ready to die any day now, it may be advantageous to use the cash for clunkers program to offset your total costs by the voucher amount minus the original trade-in value.

Because the trade-in car is going to be scrapped, you cannot get any additional trade-in value for it other than the voucher.  If the car’s trade-in value is more than $4,500, it doesn’t make sense to use the CARS program to get just $4,500.  This website here lists all the cars with a trade-in value of less than $4,500 that could qualify for the CARS program.  If your car is one of those in the list, you could use it as a trade-in for the CARS program.  Of course, you should ascertain the real trade-in value of your car at your local dealer. If the trade-in value of the car is just about $4,500, it makes sense to use the program and take the clunker out of circulation for the sake of the environment.  However, the lower the value of your trade-in is, the more there is financial benefit in addition to the environmental benefit in using the program.

There is a benefit to the environment in reduced greenhouse gas emissions from tailpipes when a fuel-efficient car replaces a gas guzzling clunker.  However, to really make it good for the environment, the CARS program should not have required the replacement vehicle to be a brand-new vehicle.  Clunker owners would be more likely to use the program if the costs were not so onerous.

As far as the auto manufacturers go, any boost to new car sales from the cash for clunkers program would be highly welcomed by them given the ongoing decline in sales experienced by auto manufacturers across the board.  It is unlikely in my opinion that the program will provide a significant and substantial relief to the auto manufacturers.

Total Cost of Automobile Ownership

If you are in the market for a new car to take advantage of the cash for clunkers program or otherwise, it is a good idea to compare the total cost of ownership between the different car options to chose the best option over all.  A car that costs cheapest out the dealer door, may not be the cheapest car when you add up all the costs to own and operate the car.

Edmunds.com has a good explanation of cost of ownership here at this webpage.  You can specify the details of your car including make, model, and year etc. on this webpage to get an estimate of the cost of ownership.  You can even compare similar models for total cost of ownership.  For example, even though the 2009 Nissan Ultima costs more at $22,755 than the 2009 Toyota Camry at $21,915, the total cost of ownership for the Ultima is $0.54 a mile compared to $0.58 a mile for the Camry.  Over the five-year, 75,000 mile period, the Ultima is estimated to be cheaper than Camry by almost $2,500.

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