Why The “Cash For Clunkers” Idea Is Stupid
In case you haven’t heard, Congress will soon implement a “Cash For Clunkers” program. If you trade in your old car, you’ll get $3,500 towards the lease or purchase of a new one. If you have an old SUV you’ll get $4,500. Seems like a good plan doesn’t it?
Yesterday I had a short phone call with Bob Meigan, VP of TurboTax and we discussed the short-comings of this program. First of all, your car has to be a clunker. That is it shouldn’t be worth more than $3,500 since you won’t get anything extra if it is worth more. By law, the dealer will have to scrap the car so even if its worth $5,000 he’s not going to give you a dime more than the $3,500 he’s getting from the goverment.
So basically you need to be driving something like a salvaged car that you’ll trade in for a brand new one. Secondly, the salvaged car needs to be getting 18 miles or less ( I think its 16 for the SUVs) according to the EPA sticker when you first bought it.
Don’t you think that people who are driving around worthless junk with terrible gas mileage are doing it becauase they can’t afford a nicer car? Do you think a $3,500 incentive will enable them to afford a new car? The incentive is probaly worth only $70/month over a 5 year period on a car loan – I’m pretty sure you’ll need to come up with the rest.
And in order to prevent people from gaming the system and buying salvage car for a thousand dollars and using them to get a bigger discount, the plan enforces that you must have owned the car for a year. (And the promotion only runs from July to November 2009).
So probably the only people who will be able to use this program are students who were driving around clunkers and now having found jobs despite the tough economy are looking to upgrade. However, these people would’ve bought cars anyway, so there’s no real stimulus to the economy or the car companies. Just another waste of time and money.
However, if you are in the market for a new car, remember you can deduct the sales tax this year.
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June 28th, 2009 at 4:55 am
Personally, I am debating whether I should take advantage of this program. I have a 1990 Chevrolet Astro van which we purchased new, has 182,000 miles, but still runs well. I can pay cash for a new car, so any expense of financing is not an issue. We have kept the Astro because of its utility, and it has been cheap to own and operate.
Naturally, I expect repair expenses on the Astro. This is the first year that the A/C has failed to operate. And I am sure I will have to replace the tires in a year or so. Taxes and insurance are next to nothing.
Still, I question the wisdom of trading in the Astro for a nice Honda or Kia sedan. I will have to pay a lot more in taxes and insurance. Since we keep our cars a long time, we will lose all value due to depreciation in any new car we purchase. The only thing we really gain is lower fuel cost and the “luxury” of a new car. At the moment, I am still leaning towards keeping my Astro and just taking my chances it won’t “blow up” in the next 5 years!
June 30th, 2009 at 3:02 pm
I second everything Red Oscar has said. Dont be so quick to stereotype people that drive older cars. Each individuals situations and ideals are quite different. I drive old cars because I would rather invest my money and use it towards travel than spend it on depreciating steel.
I would consider trading in an old truck for a newer vehicle if the terms worked for me.
June 30th, 2009 at 4:19 pm
Bryan, I totally agree. I’m driving a 9 year old Honda but I don’t qualify for an upgrade since I get over 18 miles a gallon.
The point I’m trying to make is that people who qualify probably won’t or can’t take advantage of it and people who would take part in it don’t qualify. That’s why its stupid.
July 3rd, 2009 at 4:34 am
I only wish I had your 9 year old Honda. When I commented about my 1990 Astro Van, I didn’t even mention about my 1992 Acura Integra with 170,000 miles. Like you, it gets too high mileage, so it doesn’t qualify. But it is pretty much a POS, and it was the car I really wanted to trade in under the incentive.
This CARS program was obviously targeted towards SUVs, large pickup, vans, and land yachts. It’s a half-baked attempt to get a few older vehicles off the road; but in the end, it is “all show and no go”.
July 3rd, 2009 at 3:53 pm
I agree with the comments here. The Cash for Clunkers program requires a huge financial commitment from clunker owners. Whether by choice or lack of it, clunker owners are not likely to be able to spend $20,000 starting out (not counting the insurance and registration costs) even if the deal is sweetened by $3,500 for $4,500. However, if you have a clunker and it is about ready to die, and you are able to spend money for a new vehicle, it may be a good opportunity to save up to $4,500. Of course, your clunker has to qualify, and hopefully its trade-in value is less than $4500, preferably much less than that.
Red Oscar, I don’t know the estimated life in mileage for the Chevrolet Astro van. But, if it is about ready to die, and everything else fits, you might be able to take advantage of the program. See my blog post here for details.
July 3rd, 2009 at 10:24 pm
NorCalSavant, I pretty much know that the Astro qualifies for the program. Whether I would get $3500 or $4500 depends on the mileage of the vehicle I would purchase.
Still, my dilemma is that I could likely get another 100,000 miles out of the Astro without spending anywhere near the $16,000 plus the increase in taxes and insurance cost of a new vehicle. If I thought the Astro was on its last leg, it would be a no-brainer. But that is probably in no way the case.
My problem with the program is that arbitrary limits have been established which would force me to part with a vehicle that is still in decent shape (the Astro), while keeping a much lesser vehicle (the Acura) because it didn’t qualify. If this program didn’t exist at all, I would probably do nothing until forced to.
My personal situation is unique, but the half-baked rules which create the conflict make little real sense when you try to think of the logic of the program. I don’t think we are getting the real story about the true intent of the program. Few people will be able to take advantage of offer, while it will generate a lot of traffic in the dealers showrooms, where the weak will take the bait and likely make irrational financial decisions.
July 4th, 2009 at 10:33 am
Red Oscar, if you are likely to get another 100,000 miles out of Astro, there really is no financial point in spending another $16,000+ for transportation.
The program is basically like a store enticing you to buy a shirt by offering a discount. If I had enough shirts already, I wouldn’t take the bite because discount aside, I will still end up parting with my money. The store, of course, hopes for me to bite. And many consumers do with such discount promises.
As I said in my blog post, the program could have been designed better to meet environmental goals by not requiring new car purchase. Clunker owners could then have afforded to replace their gas guzzlers.
When Congress decided to combine the environmental benefit with production and sales benefit for auto manufacturers, it became a “half-baked” program.
July 13th, 2009 at 8:52 am
I very stupid idea, but what can you expect from congress. These guys don’t understand fundamental economics, like the borrower is slave to the lender or you sow what you reap.
August 1st, 2009 at 12:27 pm
What people don’t understand is that this program will NOT help low-income families who can’t afford to have a car payment! Sure you get $3500 or $4500 trade in value, but you still have to pay for the rest of the vehicle! How can lower incomes do that?
For example : A family of 4 with only 1 adult working and the other unemployed, 2 small children in school. After they pay their mortgage, utilities, grocery bill, etc … there isn’t any money left over for a car payment! This is just dumb. Plain dumb. The only people who can afford to do this Cash for Clunkers are people who have the money to buy a car in the first place!
Let’s get real America ! ! !
August 1st, 2009 at 1:18 pm
Actually the program has already run out of money. Lets see how many people who couldn’t afford the cars they bought will have them repossessed in 2-3 years!
August 1st, 2009 at 3:24 pm
Just to follow up about my personal situation on this thread; we ended up trading in the Astro on a new Dodge Caliber. The government incentive alone would not have swayed me. However, when I added in the factory and dealer discounts, we were able to purchase the Dodge at half the MSRP. I pretty much concluded that this was the fire sale I was looking for.
I am not ashamed that we took advantage of the CARS program. I just figured that it was a small way for me to get some of our tax money back. And yes, we paid cash for the new Dodge.
August 5th, 2009 at 9:37 pm
I think the worst thing about it is vehicles like the Astro van that someone else may get 100,000 more miles out of and better gas milage then what they now have will be destroyed!
I’ve had several vehicles over the years
1976 Ford Ltd 18mpg land yacht, safe dependable about 6 years then left it parked for 1 1/2 years and transmission died when I started drivng again! (add 1 quart oil about every 1500 miles from purchase) very little maintance required
1980 Chevy Sport Van (Full sized) got 20+ miles in the city, it was totaled but missed it!(original owner was a mechanic)
5 years to totaled (ran out of gravel on side of road when drunk thought Yellow line was where the middle of his car was suppost to be) very little maintance tires and 1 battery! about 150,000 miles placed on no oil leaks
1984 Buick Park Ave got around 130,000 mark, added 1 quart oil every 2500 miles most times went 18mpg city at purchase, 16mpg at give away(demolition derby car) had tires and 2 batteries replaced before 380,000+ miles 1 starter and 1 power steering pump, totaled twice(bought back and drove that way, just a little rear fender damage) power windows still worked and everything else but Ac(from day i got it) Heater would burn you out of vehicle about 10 years of service usually changed oil late, sometimes 6000 to 9000 miles between changes(work kept me driving too much, don’t miss that job!)
newer vehicles
1991 Ford Aerostar 120,000 got 205,000 about 4 years so far, but have place many dollars in it (I think cheaper that buying another used vehicle since they usually have problems too) 18mpg change oil every 3000 to 4000 miles
1994 tempo(last year made) 29mpg about 180,000 miles 9 year ours, engine uses oil add quart every 2000 miles(seal leak), most of the stuff has gone down, electric windows all don’t work correctly,
To be honest, even if I had the money for these new junkers that biodegrade and loose half there value as you drive them off the lot I wouldn’t get one, maybe and older gas friendly vehicle instead, until they put out a decent electric only that wouldn’t run out of fuel if I just drove to town and back
August 14th, 2009 at 9:13 pm
I agree with Gary’s point on the vehicles being destroyed. Many people at any income level can’t afford or simply don’t want a brand new vehicle and rely on people selling used ones. Where are they going to find a good used car if they are all destroyed? I saw the “clunkers” that have been traded in at my local dealer and most of them didn’t look bad at all. One of them was a 2000 Yukon XL and it was in better shape than what I’m driving, but since my car gets good gas mileage, it’s not a “clunker” according to the government. Does someone really save that much money by trading a paid off car or SUV for another vehicle that comes with a $300+ a month payment and only a couple extra MPG? I for one would rather keep the SUV that my family fits in or the truck that can haul my trailer and anything I need to move. I thought clunkers were undependable rusted out cars with no mufflers, bad shocks and lifter tic, not 2000 Yukons, and 98 Blazers. It makes me sick seeing some of the nice cars and trucks that could have been someones transportation for years to come, but are taken off the road because the government doesn’t think they are good on gas. Kind of funny that the secret service uses Yukons, some just like the one traded in, to follow around the presidents limo. Maybe they should trade them for some Escape Hybrids for some better MPG and good PR. Wait, those are Fords and they didn’t have to bail Ford out.
August 15th, 2009 at 3:52 am
Gary and Dave……..Are you suggesting that I was wrong to trade in my 19 year old Astro Van with 183,000 miles under the “Cash for Clunkers” program? I will be the first to agree that CARS is poorly conceived and implemented. I think the waste of still drivable vehicles is, in many cases, obscene. If anything, this program has made it all the more clear that our federal govenment is misdirected, corrupt, and totally out of touch with everyday citizens. Still, I was not blind to the fact that I was able to buy a new vehicle for an unheard of price. I didn’t take on any debt and could easily afford any vehicle I purchased. But no doubt, there are probably thousands of people who made very poor financial decisions under this program. In the end, we will all pay for this poor legislation. There is no free lunch!
August 16th, 2009 at 2:36 pm
Are you suggesting that I was wrong to trade in my 19 year old Astro Van with 183,000 miles under the “Cash for Clunkers” program? No not really, if information serves me right they actually have engine problems around 235000 miles!
NO the big problem is the way they destroy good vehicles that are needed for people who actually need to upgrade! (broke down/unsafe vehicles are what needs to be gotten rid of, was behind a nice looking car the other day pouring black smoke out of the tailpipe! (that one is ready, bet they wish they could get your Astro!)
Of course some peole will probly never upgrade until forced too, I’ve got a friend who lives in another state drive 3 (got from family members) old early 70’s clunkers that look like they lost the demolition derby, and until they can’t be repaired or gas driven cars are outlawed he’s not replacing them (and if he ever does buy he’ll get one just like them) of course he can afford to pay cash for a new car!
August 16th, 2009 at 5:06 pm
In actuality this is the EXACT opposite of what america needs. The program most needed would involve trading in vehicles we can’t afford for used or more reasonably priced ones. Americans splurging on new cars, using the $3k credit is a poor idea by uneducated politicians.
Unless I am mistaken, cars lose 5-10% of their value by simply driving them off the lot…making them one of the worst high end products you could possibly buy.
August 17th, 2009 at 7:08 am
>In actuality this is the EXACT opposite of what america >needs. The program most needed would involve trading in >vehicles we can’t afford for used or more reasonably priced >ones. Americans splurging on new cars, using the $3k credit >is a poor idea by uneducated politicians.
Actually they should of done the cash for clunkers instead of the bailout money, lets see give the President of the company big bucks, why should he not deposit it and still fire all the workers, no one out there has any extra insentive to purchase a car (or money to do so) If all the funds that went that way did the cash for clunkers (with out destroying good cars) then the CEO’s of the car companies would of had reason to make cars and keep employees!
>Unless I am mistaken, cars lose 5-10% of their value by >simply driving them off the lot…making them one of the >worst high end products you could possibly buy.
I don’t know about today but years ago when you drove it off the lot it had already lost 1/3 to 1/2 of its value from signing the sale agreement since it is now an USED CAR!
Wonder what the exact value is today!
August 20th, 2009 at 7:52 pm
I want to put a different prespective on this. I own a car that qualifies for the clunker program. My dad tried talking me into getting rid of it and getting a new car. However, 2 things kept me from doing it.
1) I already spent time/money getting a scooter up and running for relatively little expense (about $2000 or so, license, gear, bike, etc). I use that as my daily commuter, so really my old car just sits unless it’s raining.
2) Let’s say I decide to buy a new car. I end up with a tangible piece of property that depreciates immediately as time goes by, and I’m not driving it since I have the scooter (we covered that above). OR … I can take the same money I would have used to buy a new car, buy up shares of stock and mutual funds in the downturned market when prices are rock-bottom, to which those shares will do nothing but APPRECIATE when the market recovers.
Needless to say, I did option #2. So far, I’ve netter a nice profit on the money I put into my mutual fund portfolio, and the market is only just beginning to recover.
If you work hard for your money, you should make your money work hard for you, rather than stuffing it away in a piece of metal which will only be worth 1/5 it’s value in 5 years anyways.
August 21st, 2009 at 2:29 am
Bob Smiley…..Perhaps the fact that I “did” work hard for my money, invested wisely, and can now live off the earnings of my portfolio says something about what we are all striving for. The choices you make today to save and invest make perfect sense and will hopefully provide opportunity for the future. I am probably 30 years your senior and understand the choices you have to make.
Even when I took part in the “cash for clunkers” program, I purchase a relatively modest vehicle. My out the door cost was only $11,250. And I feel confident that in a bad collision, my new car is far safer than the 19 year old Astro I traded. So I have no regrets about taking part in the program other than the fact we will ALL have to pay for it in the future.
August 26th, 2009 at 11:58 am
Can’t wait for the “rewards for repo” program starts when these people that can’t make the load payments after 2 months. Sweet Deal.