It may end up being great for the environment. It will certainly make some car dealers very happy. But that Cash for Clunkers bill just signed by President Obama may not be the sweet deal that consumers were awaiting.
True, the new program offers to pay $3,500 or $4,500 for old, gas-guzzling cars and trucks that are traded in for new, more efficient vehicles. Add that cash to the new-car sales-tax deduction that was in February's stimulus bill, and it looks like the government is making a car deal you can't refuse. But while the government's plan may benefit some buyers, it's not for everyone. "A lot of people will be disappointed," says Philip Reid of Edmunds.com, a car research Web site. "This is not like winning the lottery."
One reason: embedded in the program's fine print are several rules that will disqualify a large segment of drivers when the two-month plan is expected to kick off near the end of July. Cash for Clunkers works like this: cars getting less than 18 miles per gallon (combined city/highway), owned, registered and insured for at least a year, and from 1984 model years and later can be traded in for new cars. The dealer pays the owner $3,500 (if the new car gets between 4 and 10 more miles per gallon) or $4,500 (if the new car gets 10 or more miles per gallon.) The dealer then is required to scrap the car so that it doesn't end up back on the streets. The dealer is then reembursed by the federal government.
This makes the $4,500 federal guarantee a ceiling on the trade-in, not a floor. Dealers are not going to offer extra money on trade-ins that they can't resell. And that renders the Cash for Clunkers program a bad deal for anyone with an old car or truck that's worth more than $4,500. (There's a useful list of every car make, model and year that both qualifies for the program and is likely to be worth less than $4,500 at Edmonds.com.) Analysts expect that most of the vehicles that will actually be traded in under the program will be trucks, which have slightly different rules. The complete details are available at a new government Web site set up for the program at cars.gov, and in a chart at the Web site of the National Automotive Dealers Association.
The first response to the program came from scam artists who immediately started setting up Web sites telling car owners they needed to register for vouchers, and requesting fees and personal information such as Social Security numbers and bank accounts. Not so, warned the National Highway Safety Administration—OWNERS need do nothing more than drive their beaters into a dealer's lot.
Drivers who own inefficient cars that are in good shape may not want to bother. They may find they would do better by simply selling their car privately and go car shopping with the cash, says Reid, who adds that a used fuel-efficient (but not hybrid) car might be the most economical way to get new wheels.
New car shoppers should focus more intently than usual on the bottom line and not the rebate. Dealers who are already reporting busier showrooms weeks before the program kicks off may be less apt to bargain on the price of the car if they're already dangling that government handout. There is a best way to get a good price on a car: choose your model, get quotes e-mailed to you from several dealers, and then, once you've nailed the price, let them know you'll be bringing in a qualified clunker, advises Reid.
Which drivers will actually benefit from the plan? Lifestyle-changers who have been driving big old cars but want to trade-up for hybrids may benefit the most. In fact, they can triple-dip into government money, suggests Bob Meighan of TurboTax publisher Intuit. In addition to the cash for their clunker, they can get a tax credit for buying certain hybrids. And they can also take a tax deduction for the sales tax they pay on the car.
The programs' finer points may keep some people from taking advantage of the clunker cash. The car must have been registered and insured by the same owner for more than a year, so forget about buying a trashy car off of somebody who can't afford a new car, just so you can use it for the trade-in. Families who want to trade in junior's wreck so that dad can get a new car may have trouble combining forces.
Finally, anyone who just pimped their ride might want to remove the stereo and put the old wheels back on before they drive onto the dealer's lot. No sense sacrificing them to the stimulus gods or the scrap heap.