Financial Planning Blog

Although I've done my best to ignore the numerous ways the U.S. government has been devising to stimulate the economy by giving away money it doesn't really have, one program has caught my eye. The Car Allowance Rebate System (CARS) was passed into law on June 24 and is set to be up and running from July 23 through November 1, 2009. You may know it as "Cash for Clunkers", which is an apt moniker for a clunker of an idea. However, just because it is another flakey attempt at bailing out the auto industry doesn't mean we shouldn't take a closer look at whether it may benefit us individually. After all, we (and our children) will be paying for this in some manner--eventually.

The CARS program is designed to provide significant incentives for consumers to trade-in older vehicles for newer, more fuel-efficient ones.  Consumers trading in eligible older cars will receive a $3,500 to $4,500 credit on a new car purchase. Now before you get too excited, understand some of the details.

• Your trade-in vehicle must be less than 25 years old (i.e. a mid to late model 1984), and be in drivable condition. It will be interesting to see what the definition of "drivable condition" ends up being.
• The trade-in vehicle must have been registered to you (and insured) for at least the previous 12 months. If you think you were going to offer your neighbor $1,000 for that old truck parked on the street, and then take it into the dealer for your $4,500 credit, think again.
• Just to make sure there is no confusion here--this credit isn't really in addition to your car's trade-in value, it's more like a guaranteed trade-in value. A requirement of the program is that the old vehicle be taken out-of-service and destroyed, so the most you will receive from the dealer is its scrap value. (If destroying a 10 year old automobile worth maybe $3,000 seems a bit wasteful to you, join the club.) Obviously, if your current vehicle is worth more than $3,500-$4,500, it is not a candidate for this program.
• If you are the proud owner or more than one clunker (and I know a few of you are out there), you can only trade-in one of them for the credit. Only one credit per person and no combining CARS credits on the purchase of a vehicle. The credit can be combined with other dealer incentives, however.
• You must purchase a new car. Make sure you negotiate a good deal, or you may lose most, or all, of the benefit of the program.
• The car you wish to trade-in must have sufficiently poor gas mileage to be eligible. Under the EPA's new measurement standards your trade-in vehicle must have a combined city/highway fuel economy of 18 miles per gallon, or less. To figure out what your old car's fuel economy rating is under the new standards, go to www.fueleconomy.gov and look under "find a car".
• The fuel economy of the new car you wish to purchase must be a significant improvement over your trade-in for you to qualify for the credit. If you are buying a new passenger car, it must get at least 10 MPG more than the old vehicle in order to qualify for the $4,500 credit. If it gets between 4 and 10 MPG more than the trade-in, you will receive the $3,500 credit. If the improvement is less than 4 MPG, there is no credit. Remember, it is the combined city/highway fuel economy that is used to determine the improvement.
• If you are purchasing a new truck, van, or SUV, the requirements for improved fuel economy are lower. Check out the details at www.cars.gov. Work trucks also have some different rules.

In the interests of full disclosure, the U.S. government has declared that I am the official owner of an eligible "clunker". (What this distinction says about a financial planner is the subject for another discussion.) We have planned a new vehicle purchase, but keep putting it off.  In this economy, waiting a while longer to purchase a new car (even though we have the cash) just seems prudent--although maybe not patriot.  The old SUV is reliable, and worth more than $3,500 to us, even if the Blue Book says different. And besides, I can't stand the thought of the old gal being shredded when she still has many more good years in her, bumping along Idaho's backcountry roads.