Is 'Cash for Clunkers' for Chumps?

July 24, 2009 — -- Americans will get a new incentive to trade-in their gas-guzzling cars today when a government rebate program that offers cash vouchers to people who trade in their cars for new fuel-efficient vehicles officially starts.

The Car Allowance Rebate System, informally called "Cash for Clunkers," was passed by Congress in June to help jump-start struggling auto sales and to improve the environment.

But some critics say the program may be economically and even environmentally counter-productive.

It will be administered by the National Highway Traffic Safety Administration through participating new car dealers who can handle the paperwork when you buy the vehicle.

Information about the program is available at www.cars.gov.

There was so much interest in the program though that when automobile dealers across the country began the certification process this morning, the federal computer system they logged into crashed due to the overwhelming demand, ABC Denver affiliate KMGH reported today.

Here's how it works: If you own a 1984 or newer vehicle that has been insured and registered to you for the past year and gets a "combined" 18 miles to the gallon or less, you can qualify. The car must also be drivable.

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, which can be used toward purchasing a new car.

If you switch to a vehicle that gets 10 miles-per-gallon or more in fuel efficiency, then the government gives you $4,500.

To see if your used car has a qualifying miles-per-gallon rating, the Department of Energy has set up a Web site with the official used car mileage ratings.

Many auto dealerships have accepted cars for the program since July 1, but the program officially begins today, when the National Highway Traffic Safety Administration will release the system's final guidelines.

Chrysler Group LLC announced Wednesday it would match the government's incentive program for most of its 2009 Chrysler, Dodge and Jeep models. The automaker will offer consumers an additional $3,500 to $4,500 rebate or zero precent financing on top of the money they will already receive from the federal government.

But before any consumer takes part in this program, there are some pitfalls and guidelines to watch out for.

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, some experts contend 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!

Still want to be green? There are plenty of 3-year-old vehicles with excellent fuel economy. The technology hasn't changed much in the past few years. It's also a great time to buy used because cars and trucks are incredibly reliable these days. They can easily chug along for 200,000 miles with few problems.

So, you decide. Would you rather save $4,000? Or $14,000?