Clunkers For Cash: Is It Even Worth It?

2009 July 17
by Kyle Bumpus
from → Economy

In an effort to get gas-guzzling SUVs off the road, the Obama administration recently pushed the Cash For Clunkers program through congress.  This $1 billion program can be worth a tax credit of up to $4,500 off the price of a new car lease or purchase.  That sounds like a pretty good deal on the surface, but is it really?

Cash For Clunkers Rules

In order to qualify for the Cash For Clunkers program, certain rules must first be met.

  • Only drivable clunkers manufactured within the last 25 years are eligible, and must have been continuously insured for at least one year by the current owners leading up to the trade-in.  That is, junkyard vehicles or used cars bought just for the purpose of taking advantage of the program are a no-go.
  • Only new vehicles costing less than $45,000 (sticker price) are eligible for the program
  • Passenger cars must get an EPA-estimated 22 mpg or more in order to qualify for the program.  If the new car four more miles to the gallon than your old care, you get a $3,500 tax credit.  If it gets 10 mpg more than your old car, you get the full $4,500 tax credit.
  • Trucks and SUVs only need an EPA-estimated 18 mpg to qualify, and the mpg improvements required for the $3,500 and $4,500 tax credits are 2 mpg and 5 mpg, respectively.  I hate to ask the obvious, but if the point of the program is to get gas-guzzlers off the road, why allow trucks and SUVs to qualify at all?

Is It Worth Trading In Your Clunker For Cash?

For the most part, the answer is yes:  it’s worth it, but only if you were going to buy a new car anyway.  After all, a $4,500 discount is a $4,500 discount.  I worry, however, that many consumers will get suckered into using this as an excuse to buy much more car than they can afford.  If you use the credit to buy a $30,000 care when you would have otherwise bought a $20,000 car, you’ve actually made a poor financial decision.  It may be a better car and may even make you a happy camper, but from a strictly financial standpoint it doesn’t make sense.  Similarly, if you trade it an old vehicle just to get the discount when you would have otherwise driven it for a few more years, you’ll end up worse off, financially.

Sadly, I think many Americans will treat the $4,500 as free money and dig themselves further into debt for the sake of driving a shiny new depreciating asset for a few years.  Will the program succeed in getting the gas guzzlers off the street?  Maybe, but any success in this department is bound to be modest at best because trucks and SUVs are included.  Eighteen mpg is still pretty bad for the environment.

Other Articles On The Cash For Clunkers Program

Want to know more?  Check out these articles.

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2 Responses
  1. 2009 July 20

    Cash for clunkers is really designed to get older pickups and SUVs off the road, since most passenger cars get over 18 mpg and are therefore not eligible. As you indicated in your article, the improvements to the mpg required to get a voucher for these vehicles is so little, its almost meaningless. Since the clunker has to be crushed, you kinda have to wonder what the point is.

  2. 2009 August 5
    Chad permalink

    This cash for clunkers thing is a stupid idea. In most cases it results in the waste of a perfectly servicable vehicle with nothing wrong with it, that is most likely paid for. It entices people to think they are getting “Free Money” for thier “clunker” when in reality, they will most likely be saddled with a car payment for the next 60 to 84 months. Ok, so if i have a paid for “clunker” that is mechanically sound in good condition, the govt is going to give me up to 4500 dollars to destroy a perfectly good paid for car, in order to go buy a brand new car that is going to lose almost half its value in the first year to year and a half that I own the thing. tie up on average of 485.00 a month for the next 72 months, that I could have invested instead had i just kept my old car. Right now gas is 2.499 a gallon here. In order for the 4500 dollar “rebate” to pay off I would have to save over 800 gallons of fuel in the first year just to keep up with the depreciation on the new cars value in the first year. (assuming a conservative 6,500 dollar depreciation in the first year of ownership and figuring in the 4500 dollar rebate) This is STUPID!! No wonder people are broke.

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