Cash for Clunkers – Can it Reduce Your Need For Vehicle Financing?

The Cash for Clunkers program – or the Consumer Assistance Recycle and Save Act of 2009, it’s official name, provides a federal government voucher up to $4,500 to help offset the cost of new car purchases or leases over the next five months. Basically, the rebate is just deducted from the price of a new car that you buy when you trade in a qualifying car under the Cash for Clunkers program. You can only trade in vehicles less than 25 years old that are in drivable condition and that have been insured for the last twelve months. In addition, these cars must have a fuel economy rating of no more than 18 MPG combined city and highway. You can find out your car’s rating by visiting fueleconomy.gov.

The act has been on the receiving end of some criticism, since the program has a number of drawbacks that make it difficult for most people to qualify or benefit from the program. For example, the Cash for Clunkers rebate program is a credit given in place of the money you would normally receive for a trade-in, (not in addition to it) since the “clunkers” are to be disposed of in an effort to get the bad-for-the-environment, fuel-guzzling beasts off the road – and if the dealers are disposing of the vehicles without the ability to resell them, it’s worth nothing to them as a trade-in. If your car is worth more than $4,500, you’d be better off trading it in or selling it outright than you would be to turn it in under the Cash for Clunkers program.

Not to mention that if you’re currently driving around in a vehicle that’s worth less than $4,500 and costing you half your paycheck each week in gasoline, are you really in a financial position to purchase a new car during what’s being called the “Great Recession”? A credit of $4,500 off the price of a new car still leads you several thousand dollars to finance or pay for. Driving a gas guzzling car with no car payments is still probably cheaper for you than paying a $300 or higher car payment each month.

In order to get the $4,500 credit on new passenger cars under this program, the vehicles must have a fuel economy of 22 MPG or better. You’d also need to purchase a car with a 10 MPG improvement or more over your “clunker”. If the new car you purchase gets four more miles to the gallon than the old car, then you would qualify for a $3,500 credit instead of the full $4,500. For trucks and SUVs, the new vehicle must get at least 18 MPG but you can qualify for a $3,500 credit with as little as a 2 MPG fuel economy improvement over your “clunker”. With just 5 MPG improvement, you increase the credit to the full $4,500 allowed.

Are their any situations when the Cash for Clunkers program may in fact help reduce your need for vehicle financing? During a time when credit is becoming increasingly difficult to qualify for, having $4,500 deducted from the price of a new car will reduce the amount of money you need to borrow to finance that vehicle. Combined with any dealer rebate incentives and price haggling you do, as well as your own down payment, the extra $4,500 can play a significant role in decreasing the overall price of the vehicle and help you qualify for financing that you may otherwise not have been able to get.

Another scenario where the Cash for Clunkers program may be beneficial are for families who are on the more affluent side and have multiple vehicles. Sometimes families keep an old clunker of a pickup truck around for taking their garbage to the landfill, for example, or for helping their friends move furniture every now and then. If you’re in the market to replace this vehicle with a more reliable, more gas-efficient model, the Cash for Clunkers program can help you save $4,500 on the cost of your replacement.