Categorized | Expenses, Featured, Traveling

Cash for Clunkers: Is It Worth It?

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.

carwreck
(*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.

Supplemental Information

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.

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MLR is passionate about saving for his future while maintaining a high quality of life. He currently resides in a great town, has a wonderful girlfriend, adopted the cutest puppy ever, and works for a Fortune 500 company.


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20 Comments For This Post

  1. Peter Says:

    thanks for the link!

    My problem with this program is that it is defined so slim that the only people that might actually be helped by the program are people that probably can’t afford a new car. Most of the cars on the road that are inefficient enough to qualify are driven by lower income folks that can’t afford a new car, even with incentives/etc (of course that doesn’t always stop people I know.) Nice idea I guess I just don’t think it’s going to do much.
    .-= Peter´s last blog ..Ways To Watch TV Without Paying An Arm And A Leg For Cable Or Satellite =-.

    [Reply]

    MyLifeROI Reply:

    @Peter,

    I looked at the link you sent to me showing that 5-10% of cars are applicable.

    Very interesting.

    This made me start thinking about the program. Perhaps doing a percentage increase in gas mileage with no minimum would have been a better idea (eg trading your car up to any car that gets 20% better fuel efficiency qualifies).

    I was reading up on the German version of this bill and apparently it led to the highest year for car sales ever. I might be wrong, I am going off of memory here :)

    [Reply]

  2. David Leonhardt Says:

    Great analysis of the economics. Given the environmental benefits of better fuel economy and the environmental costs of manufacturing, it would be interesting to see an environment blog do a similar eco-analysis.
    .-= David Leonhardt´s last blog ..Want a link on a throw-away domain? =-.

    [Reply]

  3. Roger Says:

    Good stuff, MLR. It’s nice to see the actual math behind the Cash for Clunkers program; I’ll have to determine whether this will actually help me. I kind of doubt it, as it’s fairly new and gets (from my rough calculations) at least twenty miles per gallon, but still, it’s nice to have the option.

    [Reply]

  4. Jeff Says:

    Seems like you might want to take into account the monthly cost of the “clunker”, which presumably can be driven without a monthly car payment and with a comparably smaller monthly insurance cost.

    The money saved by a more fuel efficient car pales in comparison to the additional expenses of a car payment and comprehensive insurance (a requirement for most car loans).

    [Reply]

    MyLifeROI Reply:

    @Jeff,

    One assumption I was making was that the car you are currently using is in pretty rough condition. (See: “It is also in pretty rough condition (give it another year and it will look like the SUV in the picture above!)”)

    If your used car is in perfect condition, the tables are turned substantially and the analysis needs to be reworked.

    Good thought, though! Glad to see my readers are critical of what they read! :)

    [Reply]

  5. Car Dealer Says:

    A lot of people are angry with the fact the Cash for Clunkers program does not apply to used cars but the program can’t satisfy everyone. If you can’t afford a new car then this program is not for you. There is only a one billion dollar fund so act fast if you are going to pursue this program.

    [Reply]

  6. Steve Szalinski Says:

    Has anyone calculated the ROI work up (Return on investment) that the government gets on this?
    Realizing that there are many “soft” variables……………………………………………….
    They spent 1 Billion..what did they actually “make” on this deal?

    [Reply]

    MyLifeROI Reply:

    @Steve Szalinski,

    An increase in consumer confidence! That’s pretty valuable.

    And when the car industry was expecting to do 10 million cars this year, a 250,000 car boost in one week is pretty huge!

    MLR

    [Reply]

    M Reply:

    @Steve Szalinski,

    One thing that I don’t want people to lose sight of is…

    > They spent 1 Billion..what did they actually “make” on this deal?

    No, WE had x billions spent out of coffers that we have no say over… those coffers are filled out of our pockets, but emptied at congress’ behest.

    Who benefits?

    a) first off, the person who doesn’t see that part of the money is coming from their own pocket — or doesn’t care, as long as MOST of the money is coming from someone else’s pockets
    and, has a clunker-enough of a car
    and, can afford to buy a new car.

    This is pulling money from someone else’s paycheck as an incentive to “you” to go (deeper) into debt.

    Who doesn’t?

    1) the poor shmoe who still doesn’t have good enough credit to get a car… but look on the bright side, after you get through paying off your neighbors’ houses (from default), you can start paying off bailed-defaulted-car loans.

    2) the conscientious green guy — who already scrimped and saved to replace his carbon breather with an overly-expensive hybrid… he’s still paying it off, and from the manufacturing perspective, the whole process is upside-down… 20-30 years for a pay-off? Puh-LEAZE! Anyway, he’s doubly-off… even if he wanted to trade it in, it gets WAY to good of gas milage.

    3) the guy whose car is not crappy enough. That’s ok, he probably also doesn’t need to be taking on new debt. But that won’t stop him from paying for someone else’s…

    4) anybody who could really use a CHEAP, USED car… gov’t regs require that the traded “clunker” be rendered inoperable — destroyed, essentially. Instead of giving cars to the Kidney Foundation or some charity to be checked out and tuned up and whatnot, and given to some other poor shmoe to is really down on their luck — something to hopefully give them a leg up, the gov’t wants them trashed.

    What’s the ROI if the gov’t is spending money that doesn’t exist and expects YOU to pay the bill?

    This is pure magic… wave a wand, make up money, spend it on made up stuff, and pretend that Americans can pay it off. Heck, why not just write a fictional check from us to the government and declare the budget has been balanced, and the deficit is paid off?

    It’s just crazy enough, it might work!

    [Reply]

  7. Brad Says:

    My complaint isn’t that poor people can’t afford the new cars, although some way to add an additional subsidy would have been great, but that the requirements on the MPG increases should have been even more stringent. It would have been really great though if there had been an interlocking subsidy to benefit some other people who might not have been able to make use of the program. If you look at it however, ultimately that $4,500 has a significant utility increase the less money you make.

    The reason it doesn’t include used cars is of course because that wouldn’t be as “stimulative.” From a perspective of getting inefficient cars off the road, the capacity to buy a used car with the money would have been a better idea. From the perspective of trying to achieve that while “stimulating” the economy, having people buy new cars makes more sense. I don’t necessarily think that it should have been implemented that way, but the reasoning is pretty clear.
    .-= Brad´s last blog ..Some Thoughts on “Dollar Cost Averaging” =-.

    [Reply]

  8. Cars4Charities Says:

    Cash for clunkers is not only not a benefit to the environment, is is also not a benefit to used car dealers, auto parts stores, auto mechanics, car donation charities and the poor.

    [Reply]

    MyLifeROI Reply:

    @Cars4Charities,

    But, it IS a benefit to car dealers, the consumer who gets a deal and is in need of car anyways, the car manufacturers who are getting positive cash flow and clearing out old inventory, and the auto suppliers who will start getting increased business when the car manufacturers need to start producing to get their inventory back where it should be.

    Two sides to every story.

    [Reply]

  9. Clifford McCarthy Says:

    I think feel the car for clunkers legislation is a good idea. The same happens over here in the UK and i know of people who have benefited from it. but also know of people who work for small companies and are struggling as a result. new cars are what people
    want but sometimes they cannot give away there old car never mind get a large sum of money to put towards the car they might have always wanted.

    [Reply]

  10. John Beesley Says:

    captivating post, I found this right in time. I’m going to save this post for future reference. Thank You.

    [Reply]

  11. Ron Says:

    Cash for clunkers is a good idea, BUT as Americans our goal should be to reduce our oil dependance on foreign suppliers. Let’s give a credit to fuel efficient cars.

    [Reply]

  12. electric breast pump reviews Says:

    Hi there, I discovered your web site by means of Google at the same time as looking for a related topic, your web site got here up, it seems to be good. I’ve bookmarked it in my google bookmarks.

    [Reply]

  13. Ron Power Says:

    Now that I need a new car this program has been cancelled, that really sucks. I could have saved over 2K on my new car purchase. I never win!!

    [Reply]

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I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.


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