Assuming
the program is still available when you get this newsletter, we have
several questions about the Cash for Clunkers plan and at first glance
it looks like a pretty good idea if you are considering the purchase of
a new car. After a little examination and thought, it doesn’t seem
nearly as attractive or effective as we have been led to believe.
If you have a “clunker” that you want to get rid of and have the credit
worthiness to qualify for a new car loan, and don’t mind taking on new
debt during the present financial crisis, then maybe you will benefit
from the program. A clunker is defined as any car built after
1984, getting less than 18 miles per gallon. To qualify for the new
voucher program the clunker has to have been owned, registered and
insured by the same person for at least one year prior to consideration
for trade in.
Once traded in the clunker will be destroyed, not to re-enter the
vehicle market as a drivable vehicle or as salvage parts. That means
that all you are going to get is the value of the voucher regardless of
the marketable value of the vehicle.
To qualify for a $3500 voucher you have to trade the clunker in for a
car getting at least 22 miles per gallon, a net improvement of at least
4 mpg.
To qualify for a
$4500 voucher you would have to trade into a car that has a rating of
at least 10 mpg higher than your clunker. For small trucks and SUV’s
(under 6000 pounds) the mileage increase is much less. The new truck
has to get at least 18 mpg and the improvement from the traded in
clunker can be as little as 2 mpg for a $3500 voucher and 5 mpg for
$4500.
For larger SUVs and pick-ups (6000 to 8500 pounds) the minimum fuel
economy must be at least 15 mpg and the improvement must be at least
one mpg over the trade-in for $3500 and two mpg for $4500.
In any case, the new vehicle cannot cost more than $45000.
There are no restrictions on manufacturer. Either domestic or imports are allowed as long as the mileage criterion is met.
Proponents of the plan claim as many as two million new car sales will
be stimulated by this incentive package, however many in the automotive
industry and the financial markets feel this estimate is grossly
overstated.
The
destruction of the clunker limits its value as a trade-in to a maximum
of $4500 thus eliminating most cars less than 10 years old. A person
owning a car of greater value receives no incentive to trade.
Likewise a person owning a car that already gets reasonably good gas
mileage would have little or no incentive to trade. In order to reach
the improvement in mileage needed to qualify, they would most likely
have to downsize the vehicle that they drive.
Finally, this grand plan pre-supposes that the person wishing to make
use of it will qualify for financing. Most cars that would pass the
clunker test are not in the hands of the original new car buyer. They
are in the second or third tier of ownership, having passed from the
new car buyer, to the “clean used car” market and possibly into the “we
tote the note” segment. This segment of the car buying public seldom
buys a new car, and it is unlikely that even a $4500 incentive will
improve his credit or personal finances enough to make a new car loan
possible. Many of us have an older car or pick-up in our fleet
that we use on weekends or maybe one of the kids drives to school.
Replacing that vehicle with a 20 or 30 thousand dollar replacement,
taking on a five year note and increased insurance costs may not make
good financial sense.
Of course if “they” can get us thinking about a great deal on a new car
and get us into the dealership, they have a shot at selling us a new
car even if we do not qualify for the incentive.
Remember the old saying..."If it looks to good to be true...it probably isn't as good as it looks."
Information Provided by John Miller of Freedom Auto in Stafford, Texas