Cash for Clunkers Car Buying Stimulus Bill

Cash for Clunkers, is a federal program passed by Congress and expected to be signed into law by President Obama. The program would encourage consumers to trade in older, less fuel efficient vehicles for new vehicles that get better fuel economy by providing vouchers worth up to $4,500. Modeled after several programs that have already been successfully implemented in Europe, the program is expected to be implemented in early August and run through October.

Though final details of the program have yet to be established, below are broad aspects of the Cash for Clunkers program as we know them today. The program would offer vouchers that allow consumers to save from $3,500 to $4,500 on a new-car purchase, and there are also various credits for trucks and work trucks.

Though information from Congress suggests that the program may stimulate 500,000 new-car purchases, Edmunds.com believes that it will be a struggle to reach 250,000 vehicles, since the bill that passed Congress was far more restrictive than the original proposals, and its time frame reduced from one year to just several months.

"A program intended to stimulate new car sales should target people in the market for a car, but the program does not," asserted Edmunds.com CEO Jeremy Anwyl. "The only people who qualify are those willing to take no more than $4,500 for their current car and immediately buy a new one — quite a narrow profile."

Consumers should know that it in many cases it will not make financial sense to use the Cash for Clunkers vouchers. If your used car is worth more than $4,500 than this bill will probably not help you.

Cash for Clunkers At a Glance

Consumers who have owned and operated an older car for at least one year may trade in their vehicles and receive vouchers worth up to $4,500 to help pay for new, more fuel-efficient cars and trucks. The program is expected to run through October and divides cars, trucks, SUVs and minivans into several categories. Vehicles that are traded in are to be crushed, not resold, and the sticker price of the replacement vehicle they purchase is not to exceed $45,000. Miles-per-gallon figures below refer to EPA "window sticker" values.

Passenger cars: The old car you would like to trade in must have been manufactured in 1984 or later, and must get 18 mpg or less city/highway combined. If the mileage of the new car is at least 4 mpg higher than the old vehicle, the voucher will be worth $3,500. If the mileage of the new car is at least 10 mpg higher than the old vehicle, the voucher will be worth $4,500.

SUVs, pickups, and minivans: The old vehicle you would like to trade in must have been made in 1984 or later, owned, insured and operated by you for one year, and must get 18 mpg or less city/highway combined. If the mileage of the new vehicle is at least 2 mpg higher than the old vehicle, the voucher will be worth $3,500. If the mileage of the new car is at least 5 mpg higher than the old vehicle, the voucher will be worth $4,500.

Large light-duty truck: New large trucks (pickup trucks and vans weighing between 6,000 and 8,500 pounds) with mileage of at least 15 mpg are eligible for vouchers. If the mileage of the new truck is at least 1 mpg higher than the old truck, the voucher will be worth $3,500. If the mileage of the new truck is at least 2 mpg higher than the old truck, the voucher will be worth $4,500.

Work truck: Under the agreement, consumers can trade in a pre-2002 work truck (defined as a pickup truck or cargo van weighing from 8,500-10,000 pounds) and receive a voucher worth $3,500 for a new work truck in the same or smaller weight class. There will be a finite number of these vouchers, based on this vehicle class' market share. There are no EPA mileage measures for these trucks; however, because newer models are cleaner than older models, the age requirement ensures that the trade will improve environmental quality. Consumers can also "trade down," receiving a $3,500 voucher for trading in an older work truck and purchasing a smaller light-duty truck weighing from 6,000-8,500 pounds.

FAQ

How much are the vouchers worth? This will depend on the car you are turning in and the type of car you buy. In general, if the improvement in fuel economy between your old car and the car you buy is 10 mpg (combined highway mileage according to the EPA), the maximum credit will be $4,500. The requirement for improvement in fuel economy for SUVs, pickup trucks and minivans is lower. For specifics, see above.

How old does my car need to be? Eligible vehicles must be manufactured in model year 1984 or later. For work trucks however, any model built before 2002 is eligible. We anticipate that most cars traded in will likely be model-year 2000 and older.

What types of vehicles qualify? The vehicle must have a federal combined city/highway fuel economy of 18 or less miles per gallon. This means that many American-made cars and trucks will be eligible for vouchers toward the purchase of new vehicles. The categories of vehicles that will qualify fall into four classes: passenger cars, pickup trucks/SUV/minivan, large light-duty trucks (6,000-8,500 pounds) and work trucks (8,500-10,000 pounds).

What kind of mpg will the new vehicle need to get? Different levels of improvement are required for each type of vehicle. In passenger cars, if mileage is improved by 10 mpg, the $4,500 voucher is awarded; if fuel economy is improved by only 4 mpg, the $3,500 voucher is awarded. The mileage improvement levels and voucher amounts for the different classes of trucks are listed above.

Is there a time limit or cap on the number of vehicles? The bill has been funded with $1 billion, and that funding has been approved through November of 2009. Unless additional funding is provided, the program will expire by November. Since there is a funding limit, consumers who are interested in taking advantage of this program should contact a participating dealer as soon as funds become available (this will likely be in early August). There is a special provision in the bill that requires that no more than 7.5 percent of the funds for the program shall be used for work trucks.

How long do I need to have owned the vehicle I'm trading in? The vehicle must be insured and registered in your name and in use for at least one year.

If I have an older car that is in good running condition, or a classic car, is it mandatory for me to turn it in? No. This program is completely voluntary.

What happens to the car that you trade in? The dealer is responsible for sending the vehicle to a disposal facility. The entire vehicle will be crushed or shredded so that the car does not end up on the road again.

How will this affect used-car values? Since the "clunkers" will be taken off the road, there will be fewer older vehicles in the marketplace. However, our analysts don't expect this program to drastically affect used-car values.

Where do I find the mpg numbers to see if my vehicle qualifies for the Cash for Clunkers vouchers? The EPA's combined mileage will be used. This is a combination of the highway and city mileage for vehicles. Models prior to 2008 will use the converted MPG numbers which take into account the new EPA testing methods. This information can be found on the window sticker of the car or at fueleconomy.gov.

Although many vehicles will qualify for the program, it may not always make financial sense to trade it in. We've compiled a list of eligible trade-in vehicles that average 18 mpg or less, and have a value of less than $4,500.

What kind of vehicles qualify as large light-duty trucks? Trucks qualify based on class and vehicle weight. If you are considering taking advantage of this program, look up your vehicle on Edmunds.com and determine its weight. If it is between 6,000 and 8,500 pounds and gets less than 15 mpg, you have a large light-duty truck and will need to buy a truck that improves your fuel economy by 1 mpg for a $3,500 voucher. If you select a truck that improves fuel economy by at least 2 mpg, you will qualify for the $4,500 voucher. A work truck is classified as being between 8,500 and 10,000 pounds. The only requirement for this class is that the trade-in vehicle needs to have been built before model-year 2002.

When is the program expected to go into effect, and will it be retroactive? The program is expected to go into effect in early August. It will not be retroactive to any vehicle purchase made before the program goes into effect.

Where will the money for vouchers come from? Since President Obama wants this to move as quickly as possible, it is likely that the money will come from the already approved Troubled Asset Relief Program (TARP) funds and the economic stimulus package.

Does the voucher augment or replace what the dealer would give me for my trade-in? The money you receive from the Cash for Clunkers program will act as your trade in value. It's unlikely to be combined with a dealer's trade in offer since the car you are trading is being crushed and therefore cannot be resold. This program is primarily designed to inflate the value of older vehicles worth less than $4,500.

Is there a limit on the price of the vehicle purchased with Cash for Clunkers vouchers? Vehicles purchased with the vouchers must have an MSRP of $45,000 or less.

How will the program be tracked? Via dealers or the DMV? It is likely that dealers will be able to obtain vouchers online once you establish the vehicle you are trading in. The Vehicle Identification Number (VIN) will be the prime tool in verifying information on the trade-in vehicle such as model year, engine size and the corresponding EPA-rated fuel-economy levels. The government has numerous databases with information on cars that are tracked through their VIN.

How will you get the money toward the trade-in? An electronic transfer from the government to the dealer will be issued once a vehicle is determined to qualify for the Cash for Clunkers program. The voucher amount would be credited as all or part of the down payment on a qualifying new car.

Will it apply to used-car purchases? No.

What if you're leasing a vehicle and wish to trade it in? Though all the final details of the program have been settled, it is unlikely that consumers who are currently leasing vehicles will qualify for this program.

What if you wish to lease the new vehicle? In this case, it appears likely that the voucher could be applied to a leased vehicle as a "capitalized cost adjustment." This would lower the price of the vehicle and thus reduce the monthly payment of a lease. In order for a lease to qualify, the term must be for no less than five years. However, we don't recommend getting into a five-year lease because of the additional costs.

Can the vouchers be combined with other manufacturer incentives? Yes, the voucher can be combined with incentives such as low interest financing and customer cash back. In some cases this will dramatically lower the purchase price of the vehicle.