There has been a lot of talk about the Cash for Clunkers program over the past few days. Bible Money Matters wrote an article that goes over all of the details of the cash for clunkers program very well.
Questions of whether or not it is a good idea are flying around. But at this point, who cares? It has passed.
So, is it a good program for you? Let’s go over two different cases where it could be worth it to utilize the program.
(*they will only accept a car that is in driving condition)
Old SUV (2000 Jeep Cherokee) to New Car (2009 Honda Civic EX)
Say you are getting tired of your old 2000 Jeep Cherokee that gets 15 mpg. It is also in pretty rough condition (give it another year and it will look like the SUV in the picture above!) so you wouldn’t get its KBB value, you would be lucky to get a few grand for it. You want to upgrade to a more fuel efficient car and Civics have really piqued your interest because of their reputation for quality.You also noticed that the 2009 Honda Civic EX gets 29 mpg, almost double what you get now!
The example doesn’t have to be a Cherokee, a number of old SUVs have a combined EPA estimate of less than 19 mpg. The example doesn’t have to be a Civic, either, as plenty of new cars get better than a combined EPA estimate of 29 mpg.
In this scenario, the new Honda Civic EX will meet the requirements of being at least a 10 mpg improvement for the $4,500 voucher. If you are converting to a less fuel efficient car but can reap a benefit of at least 4 mpg, you can still get a $3,500 voucher. (See supplemental table below)
In your search to replace your Cherokee you decide to look at used Civics. Common financial wisdom says that you should look at 3 year old cars to get the best value. You will be buying after a bulk of the depreciation has occurred, but before a lot of the maintenance work has to be done. A quick search on CarMax and a validation with Kelley’s Blue Book shows that a 2006 Honda Civic EX can be purchased for, on average, $15,000 no haggle.
But, you don’t jump the gun. You want to check out car dealerships because of the Cash for Clunkers program and the general state of the economy. A brand new 2009 Honda Civic EX (same options) costs $20,800, with the ability to haggle.
Assuming you can’t gain any ground on the price and only get the $4,500 cash for clunkers voucher, the brand new 2009 Civic EX will cost you $16,300, a mere $1,300 more than the 2006. In my opinion (take it as you will), I would GLADLY pay an extra $1,300 for a car that is 3 years newer with all else being equal. If there are rebates or you are good at negotiating, though, you could lessen the differential even more.
Old SUV (2004 Isuzu Rodeo) to New SUV (2009 Honda CR-V EX)
Suburban Dollar also wrote a great post explaining the cash for clunkers program.
My wife drives a 2004 Isuzu Rodeo which gets, according to fueleconomy.gov, 17 mpg. Because I am under the 18 mpg I qualify depending on what I buy. If I want to get a new SUV and $4,500 credit I would have to buy an SUV with at least 22 mpg. Or for $3,500 I only need one with 19 mpg. The kicker here though is that my vehicle is worth around $6,000 according to KBB so I would never do it, but you get the idea.
Just as I did in the first example, I will look at the difference between buying a 2006 Honda CR-V EX and a brand new 2009 Honda CR-V EX.
CarMax lists a bunch of CRV’s for sale, and doing some quick math on just the EX’s, it seems the average is about $18,000 with no ability to haggle.
Pricing a new CR-V EX with similar options through Honda gets you to a price of $25,500. Remember, though, you maintain the ability to haggle the price down lower.
If you don’t haggle and just receive the $4,500 voucher, the brand new CR-V EX will cost you $21,000. For $3,000, it is certainly worth it to look at the used version. $3,000 can be a lot of money. However, if I were the one deciding, I would still think the new CR-V for only $3,000 more would be the better deal. Again, if there are rebates or if you negotiate, the disparity would fall even more, making it a better deal.
There are a countless number of combinations of ways to qualify for either the $3,500 voucher or the $4,500 voucher. Check the supplemental information/table below to get more information.
|Summary of Car Allowance Rebate System – Cash for Clunkers Voucher Qualifications|
|Min. Fuel Economy for New Vehicle||$3,500 Voucher||$4,500 Voucher|
|Passenger Car||22 mpg *||Mileage improvement of at least 4 mpg||Mileage improvement of at least 10 mpg|
|Light-Duty Truck **||18 mpg *||Mileage improvement of at least 2 mpg||Mileage improvement of at least 5 mpg|
|Large Light-Duty Trucks ***
||15 mpg *||Mileage improvement of at least 1 mpg or trade-in of a work truck||Mileage improvement of at least 2 mpg|
|Commercial trucks ****
||Trade-in must be at least pre-2002|
* EPA Combined MPG ** under 6,000 lbs. ***6,000 lbs. – 8,500 lbs. **** 8,500 – 10,000 lbs.
So, Is It Worth It?
I think for anyone currently in the market, this is certainly worth it. This voucher is not enough of an incentive that you should run out and buy the next car you want, though. The real power in this voucher lies in your ability to stack it with any manufacturer rebates and financing promotions.
Make sure you look up the value of your current car, as Kyle mentioned. If your car is worth more than the voucher, there is no incentive at all for you to use Cash for Clunkers. The only people who can really benefit are the people who have a car that is drivable but not worth much.
You also should aim to minimize any financing costs. Paying interest on a depreciating asset is a losing battle that you should not wage. Any interest you pay will be essentially eating into the cost savings you receive from using the voucher.