Is 'Cash for Clunkers' for Chumps?

June 22, 2009 — -- If you trade in your old gas guzzler for a new vehicle, your Uncle Sam may kick in $4,500 toward the cost. Congress has just passed the so-called "Cash for Clunkers" bill.

Here's how it works: If you own a 1984 or newer vehicle that has been registered in the past year and gets 18 miles to the gallon or less, you can qualify. If you trade it in for a car that gets an additional four more miles per gallon or more, your reward is a $3,500 voucher. If you do even better and switch to a vehicle that is 10 miles per gallon or more in fuel efficiency, then the government gives you $4,500 toward the vehicle.

The concept is noble: Get less fuel-efficient, more emissions-producing cars off the road and stimulate new car sales all at once. But critics say it doesn't go far enough with its fuel efficiency requirements and could end up being a subsidy for big SUVs and trucks.

Believe it or not, even some environmentalists are against the new law. They point out that it will end the lives of perfectly serviceable vehicles with years of life left. One way to be green is to get a more carbon-friendly car. Another way to be green is to "recycle" a car by buying used.

From a strictly consumer standpoint, the Cash for Clunkers program is not a great deal. Yes, if you are bent on buying brand new, you will save money. But the savings are nothing compared with how well you can do by buying a used car.

New cars typically depreciate 20 to 30 percent in just the first year, according to the auto Web site Edmunds.com. By year three, their value is down an average of 45 percent!

Edmunds says the average sale price of a brand new car is $27,800, whereas the average price of a used car is $13,900. That's a savings of roughly $14,000 achieved simply by letting somebody else be the chump who buys the brand new vehicle!