Making the Most of “Cash for Clunkers”
In the Yahoo!Finance column that posts July 30, I look at some trends that are making new cars cheaper than used cars in some cases. Yep, you heard that right – read the full story here. Which is why I’m thinking I may have to jump on this opportunity and buy a new car.
In the past, we’ve only purchased used cars for cash; typically three-year-old models or older, selling for at least half of the original sticker price. Why? I don’t like to buy things that immediately depreciate (especially ten minutes later) and I like building wealth. Interest-laden car payments (or worse – lease payments!) are gigantic wealth-vacuums, especially if you replace your vehicle frequently. (Repeat after me: Rich people don’t pay interest on loans; they get paid interest on investments.)
So if you can get over that ‘my-car-makes-me-cool’ delusion, you can save big by buying used. Erich Merkle, president of the analysis firm Autoconomy.com, agrees: “It’s really difficult from a financial perspective to argue with that approach to servicing your transportation needs. No one buys a new car because they have to – you could buy a two- to three-year-old car. They buy new because it’s something they want to do – it’s a new model, new design, great gadgets, ‘boy I really get noticed in this vehicle, look at this back seat entertainment’ – it’s more an emotional than a rational decision.”
So anyway, we bought a certified pre-owned 2005 Honda Odyssey last year – poor timing, given the subsequent deals as the automakers imploded – but we also hung onto our junky ’99 Chrysler Town & Country, which is worth about $500. We were a one-car family until last year, and I have to admit that second car is an incredible luxury when you have three kids going three different directions for soccer, play practice, tutoring, birthday parties… not to mention that I no longer have to drop off my husband at every New York Giants home game (he now takes the clunker to the tail gate party).
Now we have the opportunity to trade our clunker in for $4,500 under the government’s Cash for Clunkers program, as long as we buy a car that gets 10 miles per gallon more than our Chrysler’s (which averages about 18 mpg). Toyota is still offering some pretty good incentives, and the Corolla gets highway mileage in the low 40s – as good as a Prius hybrid, and for $10,000 less. Very tempting…I’ll keep you posted.
In the meantime, here are five tips from the experts for folks who are thinking about taking advantage of Cash for Clunkers:
1. Figure out the trade-in value before you jump in, says Merkle. “The vehicle has to be eight years or older and worth less than what the government is going to pay,” he says, which works for legitimate clunkers but not models that hold their value well. “If you had an eight- or nine-year-old BMW, it might be worth more than $4,500 depending on the model.” Check Kelley Blue Book to gauge your vehicle’s resale value, and try the Cash for Clunkers calculator at Edmunds.com to see if you are eligible for the program.
2. Put a priority on reliability, says Jeff Bartlett, deputy online auto editor with ConsumerReports.org. “People who participate in Cash for Clunkers obviously hold on to cars longer than most people would,” he says, so choose a model that ranks high on CR’s tests for reliability, safety and performance. (That would rule out anything made by Chrysler, Dodge or Jeep, for example.) Bartlett says he’s been impressed by Hyundai, which offers the best warranty in the industry (100,000 miles) and has an array of incentives in the market right now.
3. Don’t forget to negotiate the price of the new vehicle. “People (with clunkers) haven’t bought a car in long time – they come around in their Flintstone-mobile and are so excited about buying a car with air conditioning and power windows they may forget that the $4,500 rebate doesn’t come from dealer,” says Bartlett. “The key is doing research online so you understand not only advertised incentive but what the dealer holdback and direct-to-dealer incentives are. Most car buyers don’t have daily practice in negotiating a good deal, so they might as well be armed with the figures.” You can get a price report on the car you want to buy at ConsumerReports.org.
4. Watch out for scam artists. Some dealers are advertising vehicles at prices that include the Cash for Clunkers rebate – which obviously not everyone will qualify for.
5. Watch out for the government’s bait-and-switch. Edmunds.com has issued a report noting that some buyers purchased vehicles under Cash for Clunkers only to discover they are ineligible for the rebate because the Environmental Protection Agency made mileage “refreshes” late last week, after the program started. “The program started July 1 and consumers started making their Cash for Clunkers purchases, yet the EPA made revisions to hundreds of vehicles MPG numbers without informing consumers of these changes,” said Kevin Smith, Editorial Director, Edmunds.com. See a few examples here.
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