Cash for Clunkers Cars Program: Boon or Boondoggle?

Aug. 17, 2010 -- The proposition had much appeal. Trade in your beat up vehicle for a credit of $3,500 or $4,500, depending on the type of new vehicle you purchased and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Not only would participating help the ailing economy, there was the chance to be green: fewer gas guzzlers and more fuel efficient vehicles would be a boost for the environment too.

Americans took the government up on the offer that for many was too good to pass up. They traded nearly 700,000 cars in the Cash Allowance Rebate System (CARS) or Cash for Clunkers program that ran last July and August.

So was the stimulus initiative stimulating, or a $3 billion waste of taxpayer money?

Simply put, says Paul Taylor, chief economist with the National Automobile Dealers Association, it was a success. "There was a boost to car sales in July and August, and because of the industrial production boost the four months following the program, it kept some jobs in production and retail."

Taylor credits Cash for Clunkers as an important bridge, sparking sales, giving the industry enough gas to keep going until it began recovering slowly on its own. "Cash for Clunkers was one part of the stimulus package that actually did what it was supposed to."

According to the National Highway Traffic Safety Administration estimates, Cash for Clunkers resulted in a $3.8 billion to $6.8 billion increase in GDP and over 60,000 jobs created or saved. The new vehicles obtained under the program were 58 percent more fuel efficient than the vehicles they replaced, with an average combined EPA rating of 24.9 miles per gallon, versus 15.8 MPG for the vehicles they replaced, reducing fuel consumption by 33 million gallons per year. And, there was a concomitant reduction in green house gases and other pollutants.

However, not everyone is hailing Cash for Clunkers a wild success. Edmunds.com, an online provider of automotive information determined that Cash for Clunkers cost taxpayers $24,000 per vehicle sold. Of the nearly 700,000 sold, Edmunds.com analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the program.

To conduct the analysis, the Edmunds.com team examined the sales trend for luxury vehicles and others not included in Cash for Clunkers and applied the historic relationship of those vehicles seasonally adjusted annual rate to make estimates. Estimates were independently verified through examination of sales patterns reflected by transaction data. Once the numbers were determined, Edmunds.com analysts divided $3 billion by 125,000 vehicles to arrive at the average of $24,000.

Then too, there were glitches. "Some dealers had given credit to the customer for their trade-in but it took some up to a month to get reimbursed by the government, so they had the strain of carrying that amount until they did," says Taylor.

Some didn't get reimbursed at all. The U.S. Department of Transportation says that more than 99 percent of the program rebates were approved, meaning some dealers came up short.

Ken Bennett worked at a car dealership in San Antonio, Texas, during the Cash for Clunkers program. "We probably lost $3,000-$10,000," he recalls.

A dealer could be left holding a meaningless voucher if, for example, the car traded in wasn't on the list of eligible vehicles or in one instance at Bennett's dealership, "The claim was rejected because the customer didn't keep the vehicle insured for the entire year, therefore, no claim, no money," he said.

There should have been a pre-qualifying procedure that told you if all qualifications were being met at the time of the trade. "Why not tie it all in to the proper databases, and let the system check for insurance coverage, length of registration, etc? That way, if it doesn't pass, you find out before the deal is booked, and not after the fact," says Bennett.

Furthermore, some believe the program didn't go far enough. "It did not include monies for the purchase of a used car. There are many makes and models of used vehicles that would have provided similar benefits in overall fuel efficiency," says Larry Gamache, communications director for Carfax, which provides vehicle history reports. "More importantly, including used cars would have allowed far more cash-strapped, credit-crunched Americans the opportunity to acquire a new vehicle with similar stimulative effects on local economies," he adds.

While the majority of participants financed the vehicle they purchased, some 20 percent got lease deals -- a little more than 100,000 leases were written during the program. But the program required leases of at least five years.

LeaseTrader.com reports a significant trend in people that leased a car with a Cash for Clunkers rebate looking to escape the auto lease just one year into their five-year commitment. "It's difficult for these people to exit their lease because there is very little market for a used car with three or four years left [on the lease]," said Sergio Stiberman, CEO and founder of LeaseTrader.com, in a prepared statement. "Many of these people didn't have a car payment when they took advantage of the rebate. Now they have a monthly payment and five-year commitment, which is extremely unfavorable in a leasing environment."

Leasing isn't for everyone. There are mileage limitations. Leasing can also cost you more than an equivalent loan because of higher finance charges built into the monthly payment. Then too, if you don't keep the vehicle in mint condition, you'll have to pay excess wear-and-tear charges when you return it.

Change your mind and try to get out of the lease early and you could be stuck with termination fees and penalties that you have to immediately pony up. This could equal the amount it would cost had you stuck with the lease for the original term.

But mostly, the rearview mirror look at Cash for Clunkers is a good reflection -- at least for consumers if not the U.S. Treasury.

"I traded my 14 year-old Ford Winstar. I got $5,000 off the purchase price of a new Honda Civic. My old car wasn't even worth $1,000," says Dawn McKenzie. "I got a great deal and probably wouldn't have gotten a new car had it not been for this program."

Similarly, Joyce Scardina Becker and her husband chucked their 1989 Ford Bronco, nicknamed "the beast.". It had 140,000 miles, was dying and cost $75 per fill up.

"Cash for Clunkers was the answer to our prayers," says Scardina Becker. "We could have never sold the 'Bronkie' to anyone, there were too many things wrong with it. We used the $4,000 on trade-in and bought a Ford Escape. We never looked back. Thank you Obama."