My Cash for Your Clunkers

June 11, 2009 by  
Filed under Fools of Finance

cash_clunkersNo doubt you have heard of the proposed Cash for Clunkers plan. One bill has passed the House. A different version is being considered in the Senate.

They are pathetically lame attempts to waste more of my money.

Briefly, depending on how lousy your trade-in vehicle is in the mileage department, the government is going to send car dealers between $2500 and $4500 toward your purchase price of a new, more fuel efficient vehicle.

This is not going to work. Indeed, just the mention of it is likely depressing new car sales.

Why is it depressing new car sales? Because ignorant consumers who think the plan will actually benefit them are waiting on buying until the law goes into effect.

Why won’t cash for clunkers work?

To me, the big problem is that the cash for clunkers payment to the dealer replaces the trade-in value of the vehicle. I don’t think that most people understand that.

Assume that are driving an older truck or SUV with a value of $5000. You are eager to trade it in for a fuel efficient small car. The dealer will receive $4500 clunker cash toward what you owe. Hooray. But wait…..

You get nothing for your trade-in. Zero. That’s because the law requires the dealer to scrap (as in crush) your trade-in.

Is that a lousy deal or what? You’ve traded in a vehicle worth $5000 for a $4500 credit. That’s going to sell a lot of new cars.

Some of you are thinking about the real clunkers – the cars that are so old and beat up that they are worth $500, not $5000. Won’t this plan get those off the road? Not many.

First, how many people are actually driving around in $500 cars? (The bill stipulates that the trade-in has to have been registered and in use for the past year.)

Second, for those people who are driving around in $500 cars, how many are – in this economy – suddenly in a position to replace that clunker with a new car?

Do you think that people drive around in clunkers because they enjoy it? No. They do it because that’s all they can afford. Throwing taxpayer cash into the deal won’t change the fact that the clunker drivers still can’t afford the new car loan payments.

Finally, if you think that the dealers won’t adjust the bottom line selling prices of their new cars based on this plan, raise your hand.

I’m waiting for some hands.

The number of car dealers may be shrinking but the tactics the remaining dealers will use to extract the most cash from unsuspecting consumers – not changing.

The cash for clunkers plan definitely qualifies for this week’s fools of finance award.

Photo credit:  Dave_7

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16 Responses to “My Cash for Your Clunkers”
  1. TMN says:

    I think you just missed the point entirely. Yes, for some cars you can get a dealer trade-in amount which is about the same as this program. But you’re only going to get that when the dealer intends to resell the vehicle, which means keeping it on the road. This program doubles the effect by requiring that the older vehicle be removed from service, which means the efficiency of our national vehicle fleet goes up twice as fast.

    • TMN – I understand the point but it won’t work because the financial incentives don’t line up with the objective. If the government wants to get clunkers off the road, they can buy them at an enhanced value. The seller can then spend that money on stuff they can afford, not new car.

  2. HomeFree says:

    TML – You are correct in your assumptions. Anyone who thinks this is a good deal has been inhaling gasoline fumes for far too long!

    My 1998 Chevy Silverado Z71 4×4 pickup truck (14.5 mpg) is paid for, has a low cost to insure, will protect me in a crash, and will serve me well for years to come! I paid a mere $4,700 for this beast three years ago and it is still worth much more than I paid for it!

    My truck is worth more than any government handout inticement to spend thousands of dollars for a new vehicle regardless of the MPG! This year I have driven 2,000 miles and spent less than $300 on fuel; Who cares about MPG!

    Please Mr. President and Congress – stop enacting all these stupid bailouts that are emasculating our culture. Let us be men and women who chart our own course to success. Stop stealing our hard earned dollars to bail out people and businesses who make stupid decisions. Whatever happened to the idea that choices have consequences? Quit punishing prudent citizens who didn’t borrow to much money on a house they couldn’t afford in the first place or who chose not to misuse their credit cards by instead spending wisely and paying off the balance each and every month!

  3. Joe B says:

    So when I want to buy a new car, I should go buy a $500 clunker from craigslist then take that to the dealership? With proper negotiation this could work to some consumer’s advantage, maybe.

  4. I can see the $4,500 getting folded into the price of the new car. With most people financing the new cars, it will be easy for the dealers to spread it out in the monthly payments. While it increases the efficiency of our fleet, this also effectively creates a scarcity of older cars, which drives the price up for the remaining ones. So the old Buick that I would have bought for Junior to learn how to drive in now costs me more money to buy.

  5. Nancy says:

    As someone who drives a fuel-efficient ‘clunker’ that doesn’t qualify, this plan really pisses me off. First off, we are all paying for this. So I’m rewarding someone who is buying a new car, which is not even as ‘green’ as buying a used fuel-efficient vehicle (like say a used Prius). Secondly, I’m rewarding someone who bought a vehicle with piss-poor gas mileage to begin with, someone who is finally catch up with the rest of us, and buying something that is only slightly better for the environment.

    And I think it’s just pure hypocrisy for the government to give tax credits to people who bought vehicles for business with a minimum weight requirement (vans and trucks), and then turn around and give you incentives to do the opposite.

    On top of that, this is the government shooting itself in the foot because now that we are shareholders of GM, we are going to suffer the consequences of disincentivising gas guzzler buying – how are we going to handle that massive glut of SUV’s they have waiting to be sold?

  6. Dennis says:

    As usual someone makes a comment without thinking it through. Let me review where a lot of those clunkers are. Well I will be damned I have one ( 1996 Bravada 112,000 miles 4 wheel drive all the time) just finished up my daughters senior unversity year. Guess what – its trade in value is $2500 and I will soon be giving my daughter a graduation present funded by the taxpayers including me plus cash.. Let me tell you something though it will take off the road a 12 mile per gallon polluting car and help GM sales. Am I not an unusual case — we have 4 friend that will do the same thing. The fist billion only covers 250,000 cars at $4500 so I suspect the money will be run through quickly. Its unfortunate that human nature immediately looks for a negative.

    I believe the impact of this program is underestimated — ask the Berlin authorities who ran out of funds!!!

    • Dennis: I hope this works out for you. Will you negotiate the price of your new vehicle without telling the dealer about the clunker? If not, your $2000 net benefit ($4500 less $2500 trade-in value) could quickly evaporate in the price negotiations. Of course, unless they apply the program to used cars (which is what I buy), your net benefit will be consumed by depreciation as soon as the new car rolls off the lot. That’s another reason why I don’t like my money being used for this program. Meanwhile, you and your four friends are holding off on a car purchase, hoping for government money. How does that benefit GM? The bleeding continues.

  7. cjbr549 says:

    Let’s make sure we understand something here, this bill is all about a bone to the auto manufacturers. Helping consumers and some nebulous environmental benefit are just there to help make the bill look good. I do agree that it is probably depressing sales now, which in political terms is good, because that means the bill needs to be passed quickly, with little time to review and figure out all the other unrelated crap is that’s been added to it before the president signs it. Also, increasing the price of used cars by reducing supply is also good for the auto manufacturers (and bad for the consumer). And why not just issue a salvage title for those vehicles and send them to the wrecking yard to be used for parts instead of crushing them? Reuse is always more environmentally sensible than recycling, as no energy is used or waste stream created to take a part from a junkyard car to maintain another vehicle. And from an environmental standpoint, it is better to keep the already existing vehicle on the road than to build a new one, even with the fuel mileage benefit. A huge amount of energy is used to manufacture a new car, and enormous waste streams are created. So there goes the environmental benefit. All in all, this bill is a turd in my opinion.

  8. MasterPo says:

    I also heard this trade-in credit will ONLY be for a Government Motors car, *not* a Ford or foreign car.

  9. Ahead of the curve? says:

    This plan actually worked quite well in Germany. Why do you think it will be such a miserable failure here, Mr. TML?

  10. For the reasons stated in my post, I do not believe that the number of vehicles surrendered will be worth the direct and indirect costs to the taxpayers. I would be interested in hearing the particulars of how the program operated in Germany. Do you have that information?

  11. MasterPo says:

    Obama is going to FORCE all Americans eventually to buy hybrids or electrics. Ideally from Government Motors. He’s going to raise the mileage standards sooooo high that no truck or van or SUV could meet them. And tax the hell out of those of us who hold on to our larger cars.

    I just wonder how the often sited family of 4 is going to take that summer vacation in an electric car. How far does the Volt get on a single charge – 80 miles?!

  12. Mark says:

    This plan is perfect, at least for me. I have a 2002 Dodge Stratus 130k miles, and it is on its last leg. According to Kelly, and NADA the car is worth $1200 max in good condition and I owe $4200 on it. So the government will give “me” $4500 for it?? Why would I not do it, how is this bad? They way I see it this is good in 5 ways. 1. I get out of a pos car. 2. My credit gets better (not the best, better after 2 years of on time payments on the Stratus, which is why I bought the pos) 3. A car in bad repair, bad mpg is off the road. There has to be many more people in my or similar situation. So please explain how this is a bad idea or bill ?!?!

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