The Cash for Clunkers law is intended to jump start the auto industry by inspiring people to purchase new cars.  Touted secondary benefits include aiding consumers in new car purchases and various environmental benefits.  The program offers vouchers towards the purchase of a new car when an older, lower MPG car is traded-in.  The restrictions of the law make the program much less effective than it could have been and most consumers may be better off skipping the program entirely.

The voucher you receive would start at $3,500.  Your passenger car clunker must be at least 8 years old and have fuel efficiency at least 4 MPG worse than the new car.  If it’s 10 MPG worse, then you could get the larger voucher, worth $4,500.

If your car is at least 8 years old, congratulations.  Owning vehicles for a long time is a favorite technique of the frugally minded.  Driving a more fuel-efficient car sounds like a money savings potential as well.  So what’s the problem with the Cash for Clunkers program?

New Cars Only

The biggest one is that it can only be used to buy a new car; one of the fastest depreciating assets you can buy.  A new car may lose more in value as you drive it off the lot than the voucher will hope to provide.  Also, your 8+ year old car is probably paid off.  Switching to a new car probably means adding a new car payment.

Trade-Ins Get Scrapped

The car you “trade-in” to get the credit isn’t really a trade in.  If it’s worth more than the voucher, that’s still all you’ll get for it.  Your old car will not be resold but scrapped.  The environmental benefis of fuel efficient cars may easily be trumped by the discarding of a perfectly running, older less fuel efficient car.

Of those people who would benefit from the cash for clunkers program (those with older cars worth less that $3,500-$4,500) you have to imagine that most would generally fall into two categories: frugally minded people who would never buy a new car or people who cannot afford a new car.  I fear the Cash for Clunkers program, which in my opinion is an auto manufacturer friendly law rather than a consumer friendly one, will actually hurt those consumers who use the program.

If you are thinking about using the Cash for Clunkers incentive, first consider if you need a new vehicle or if your current one is serving your needs.  If you do decide that you need a new car, do what the financially savvy do and buy used.  If the lure of the Cash for Clunkers program is too great and you do qualify, the most I can offer is to warn you that it’s probably going to end up costing you more.