Last Updated: July 13, 2009
Is it time for you to trade your old clunker for a new efficient car? President Barack Obama thinks so. In late June, President Obama signed into law the "Car Allowance Rebate System" or (CARS) otherwise referred to as Cash for Clunkers law.
Besides encouraging people like you to trade in your clunker, the new law is supposed to stimulate the automobile industry in particular and the economy. The Cash for Clunkers program, which runs from July 1 through November 1 2009, signed by President Obama on June 24th, provides tax-free vouchers to automobile dealers who participate in the new program. These program vouchers, worth between $3,500 -$4,500, will be given to dealers when consumers trade in old vehicles for ones with higher fuel efficiency. Vouchers are limited to one per customer, including joint registered owners of a single eligible trade-in vehicle, and are not considered taxable income for the car buyer.
According to FPA member, Marc Freedman, CFP®, of Freedman Financial, you must do the following to qualify for the program:
- Trade in a car that has been registered and in use for at least a year, and has a federal combined city/highway fuel-economy rating of 18 or fewer miles per gallon. By the way, this rating is not your actual miles-per-gallon (mpg) but a standard rating system for the program. There are no exceptions for cars at this time that are rated 19 mpg or higher.
- Buy a new car, priced at $45,000 or less and rated at least four mpg better than the old one (this will provide you with a $3,500 voucher). If the new car gets at least 10 mpg better, you get the full $4,500 voucher. So, for example, if you trade in that 2000 Chevrolet Suburban, rated 14 mpg, for a 2009 Honda Pilot, rated 19 mpg, the government will kick in $3,500. If you downsize to a Chevy Cobalt (27 mpg) or even a larger Honda Accord (24 mpg), you will get $4,500.
Here are several other considerations if you plan on taking advantage of the CARS law.
- Visit the official government Web site, CARS.gov, to learn more about the CARS program and look-up the combined miles-per-gallon for your car.
- Visit Fueleconomy.gov to get your vehicle's mileage rate.
- Make sure your car qualifies for the program. Besides needing a combined mpg of 18 or less, your vehicle must be less than 25 years old on the trade-in date; trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in; and the vehicle that you are trading is required to be destroyed, according to the official government Web site, CARS.gov. Therefore, the value you negotiate with the dealer for your trade is not likely to
exceed its scrap value.
- Beware of scams. The National Highway Traffic Safety Administration (NHTSA) is aware that some organizations have already begun to convey incorrect information about how dealers and individuals can participate in the CARS program. "The only official site providing information on this system is the agency's website, CARS.gov. Other sites, the NHTSA, said in a release may or may not have correct information. "We urge great caution in providing any information over the Internet to any Web site that purports to be related to this program," the NHTSA said.
- Crunch the numbers. According to the AARP Bulletin Today, the program will primarily benefit motorists with old, low-value vehicles, not those seeking to upgrade to a recent model. Remember, the vehicle that you are trading is required to be destroyed. Therefore, the value you negotiate with the dealer for your trade is not likely to exceed its scrap value. The law requires the dealer to disclose to you an estimate of the scrap value of your trade-in vehicle. As such, AARP suggests that if your car's true trade-in value is more than the scrap value plus the voucher, you may be better off shopping outside the CARS program.