You used to have a crush on that car.
Now, you're thinking about having it crushed.
It's a Chrysler you named Crystal after a girl you knew in third grade.
When gas cost a buck, you loved jumping behind the wheel for weekend trips to the coast. You trusted Crystal with your kids, buckled in the back seat.
Now you're embarrassed by Crystal's frayed upholstery, the fender that kissed a Kenworth, and the binge-drinking engine that sounds like a one-man band trapped in a furnace duct.
Putting it harshly, Crystal is a clunker, and that could work to your advantage. Under a temporary federal program popularly called Cash for Clunkers, she could be worth as much as $4,500 off the cost of a brand new car.
But not many clunkers qualify. And even if Crystal is the exception, buying or leasing a new car might not be the right financial decision for you.
Formally called the Car Allowance Rebate System (CARS), the program went through $1 billion in federal funding in little more than a week, with many people trading in gas-guzzling SUVs and pickups. The program was so popular with consumers, car dealers and automakers that Congress allocated another $2 billion to keep it going.
Cars purchased or leased through CARS can be domestic or foreign, but they must be new.
As for the trade-in cars, the law says they must be destroyed. The salvage yard can sell some parts, but the engine must be destroyed.
The value of your clunker depends on the difference in fuel efficiency between it and its replacement. If that difference is between 4 mpg and 10 mpg, the dealer is supposed to knock $3,500 off the price of the new car, and will be reimbursed that amount by the government. If the difference is more than 10 mpg, then the reduction is $4,500.
(In either case, you'll have to pay Idaho or Washington sales tax on the full amount the dealer receives from you and the government combined. However, when you file your 2009 income taxes, the federal stimulus bill will allow you to deduct the sales tax on most new cars purchased this year, even if you don't itemize. See the IRS announcement for details, and check with your tax preparer.)
CARS offers no incentive for buying a new car if the change in fuel economy is less than 4 mpg.
There's no need for consumers to sign up for CARS, and you don't need a voucher. The dealer takes care of everything.
Is it really that simple? Of course not.
For one thing, the rules are slightly different for vans, pickups and SUVs, so you have to read the details carefully at http://www.cars.gov/. And there's a list of qualifications that severely limit the number of buyers who qualify.
In a nutshell, you'll probably qualify for the discount if:
Critics say those criteria are so narrow CARS is off-limits to many consumers, particularly those whose clunkers aren't SUVs or pickups. In fact, an STCU examination of government fuel-economy listings shows that no sedan made by Honda or Saturn qualifies for the program and only a handful from makers like Hyundai, Buick, Suzuki, or Toyota.
A 1993 Dodge Colt wouldn't qualify, even if it's spewing black smoke and leaving a trail of oil. Why? Because 16 years ago, its fuel economy was rated at more than 18 mph.
A 1980 Cadillac Eldorado might burn more fuel than a fleet of pizza delivery cars, but it's too old to qualify.
Your late-model gas-guzzler might qualify in every way. But depending on its condition and mileage, it could be worth many times more than its value as a clunker. If so, you're better off selling it on the open market or using it as a conventional trade-in, rather than taking the money offered through the CARS program.
"Consider that many buyers still have a loan on their trade-ins," notes Doreen Kelsey, a financial author who often works with STCU. "That alone is going to disqualify most buyers because chances are they can't afford to pay off the old vehicle loan without getting something for their trade-in," beyond what the government offers.
Let's say Crystal is a 1985 New Yorker Fifth Avenue rated at 17 mpg. She meets the age requirement and you've had her plenty long, as evidenced by the Wham! cassette in the glove box. The loan is long since paid.
Sentimental value aside, you know Crystal is only worth a couple of hundred dollars, so it's tempting to find a new, fuel-efficient car and claim your CARS money.
Shop around, and you'll find that struggling automakers are offering extra incentives; for instance, Chrysler offers $4,500 toward the purchase of a new car (you don't need a clunker to qualify). There also are federal incentives for buying certain hybrids.
All of that, plus low interest rates on loans, means it's a good time to buy.
Still, Kelsey notes, the $28,715 average cost of a new vehicle in 2008 was about twice the average cost of a used one. Depreciation varies greatly from one model to another, but most cars lose thousands of dollars in value the first year alone.
AAA data shows that new vehicles bring higher average insurance premiums and can cost more to register. A pricier car also means paying more interest, assuming you don't pay cash.
So, even if it qualifies for the CARS program, "the average family likely is going to save the most by downsizing to a more fuel-efficient, reliable used auto," Kelsey said.
Of course, money is only one consideration.
Maybe you want a new car as a reward for years of hard work and sound financial decisions.
Maybe you want the latest whiz-bang features or warrantee provisions that can only be found on new cars.
Maybe you don't trust used cars.
Or maybe you just like the way new cars smell. If that's the case, then buy used and spend some of your savings on a bottle of new-car scent.
