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Wednesday, June 24th, 2009

The “cash for clunkers” provisions are included in an appropriations bill sent to President Barack Obama on June 18th, 2009. The details and a system for distributing and collecting vouchers may take regulators 30 to 45 days to implement, making late July or early August the soonest the incentives could be available.

The bill provides $1 billion for the program through November. Using Congressional Budget Office estimates, about 150,000 vouchers will be issued.

Here is the likely process to follow to participate: Dealers let you know that your trade qualifies, credit the amount to your down payment, then apply for the voucher. The program is only on new vehicles, domestic or imported, purchased or leased; and qualified vehicles must have sticker prices under $45,000. Buyers do not have to register or apply for any part of the program. Dealers do.

Qualified trade-in vehicles must be 1984 models or newer, get no better than 18 miles per gallon, and have been registered and insured during the past year.

What’s The Catch?

The vouchers aren’t a panacea for buyers. 

Car buyers must remember that their trades will be scrapped and have no value to the dealership above the amount of the voucher. For example, a 10-year-old Toyota Landcruiser might qualify for the biggest ($4,500) voucher, but it’s almost certainly worth more than that on the open market.

The rules      
  Passenger vehicle Light-duty truck Truck more than 6,000 pounds
Minimum combined mpg for new vehicle: 22 mpg 18 mpg 15 mpg
For $3,500, must beat trade-in by: 4 mpg 2 mpg 1 mpg
For $4,500, must beat trade-in by: 10 mpg 5 mpg 2 mpg
To find your trade-in’s official mpg: Visit Visit Visit
To find out what your trade is worth: Go To

So, Rule No. 1 for buyers intent on using the program: Check and double-check the value of the vehicle you want to trade. Almost any roadworthy vehicle is worth $1,000 and typically twice that if it’s an import.

Which leads to Rule No. 2: The mileage you get in your daily driving does not matter one bit. What matters is what’s on record with the government; the most likely source of data is A muffler-dragging 25-year-old Toyota may meet the popular definition of clunker, but if the government’s estimates show it got more than 18 mpg combined new, it’s not a clunker.

Rule No. 3: You can layer government programs: Trade an old pickup for a shiny Ford Fusion Hybrid, for example, and you can get $4,500 because the trade is going to the crusher and a $1,700 tax credit (a dollar-for-dollar cut in your taxes, way better than a deduction) for the new hybrid. 

Not all hybrids qualify for deductions; Toyota and Honda have sold their quotas under the law, and Ford’s expire in the fall. Check out current qualifying vehicles here. Some new “clean diesels” qualify for these credits as well; here’s a list.

On top of that, the sales tax on any new car, with a price of up to $49,500, bought between Feb. 17, 2009, and the end of the year is deductible on next year’s tax return.

Be Financial Savvy

Don’t let the thump of up to $4,500 in “free” money hitting the table distract you. Negotiate on a new car the same way you always would. The only thing different is that all the parties involved know exactly what the trade is worth upfront. 

To be financially prudent it is recommended that buyers limit loans to four years and put down at least 20% of the price of the car. It is also budget savvy to keep payments to no more than 10% of your monthly gross income.

There are critics of  the ‘cash for clunkers’ bill…

For many people, this means buying only an inexpensive new car. But they’re out there.  With a $4,500 voucher as a down payment and a four-year loan at 7.5%, the payments on a $10,000 car would only be about $133. You can see current loan rates here

On the other hand for someone with subprime credit -– a FICO score of 620 or below -– rates could easily top 15%, adding $50 a month to the payments on that $10,000 car.

If your credit is bad, even a car with $4,500 cash laying on the dash is a mistake.