'Cash for Clunkers' In Effect
By: Jeff Brown

On July 1, the federal government’s “cash-for-clunkers” program took effect, offering up to $4,500 to car owners who turn in gas guzzlers for new, fuel-efficient vehicles.

If you have a nearly worthless but drivable behemoth, this could be just the incentive you need to upgrade to a gas sipper, once the program’s details are complete later this month.

But the program has restrictions that lock many car owners out. And, on a purely financial basis, you’re usually better off keeping an old vehicle until it rusts out from under you.

Still, the program is worth a look. Designed to help auto makers and dealers, and to help clean up the environment, it is officially called the Car Allowance Rebate System. It has $1 billion, enough for about 250,000 car owners, and will expire Nov. 1 unless the money runs out sooner.

To qualify, the old vehicle must be drivable, no more than 25 years old and have been registered in insured by the same person for at least a year. You can’t tow in a hulk from the junkyard.

Most important, the old car must have an E.P.A. mileage rating of no more than 18 miles a gallon. For a full $4,500 credit, you must buy a new car that gets at least 10 miles a gallon more than the old one, or a new truck or SUV that gets at least 5 miles a gallon more. There’s a $3,500 credit if the new vehicle provides a smaller improvement in gas efficiency. Find full details at Cars.gov.

The rules require that the old vehicle be scrapped, meaning you’d get the credit only, not a credit plus turn-in value. You cannot use the credit to buy a used vehicle or any vehicle costing more than $45,000, but you can use it to lease a vehicle so long as the term is at least five years.

Whew! That’s a lot of restrictions.

As a practical matter, you’d come out ahead only if your old vehicle is worth less than $3,500 or $4,500, depending on what you’re turning in. If it’s worth more than that, you should turn it in the old-fashioned way, or sell it. Check your vehicle’s value at Edmunds.com.

But even if it’s worth less, it may make more sense to keep it. Many 10 and 15-year-old cars are perfectly serviceable, even if they’re only worth a couple of thousand dollars.

Since your old vehicle is probably long since paid for, your cost of driving each additional mile is pretty low, comprised of fuel, maintenance, registration, inspection and insurance costs. The new vehicle, even though more fuel efficient, could saddle you with hundreds of dollars a month in payments. It could take many, many years for greater fuel efficiency to offset that cost. Figuring the true cost of owning any vehicle is tricky and imprecise, but Edmonds has a useful calculator.

For another way of looking at it, imagine that you bought a new car every 10 years instead of every five. You’d buy half as many cars in your lifetime, cutting the purchase portion of your vehicle-ownership cost in half.

One of the biggest drawbacks to the cash-for-clunkers program is the ban on buying used vehicles. A three or four-year-old vehicle is often the best choice because it has most of its useful life ahead of it but may cost only half as much as a new vehicle. That’s because vehicles depreciate fastest in the first few years.

Still, if you have an older vehicle worth very little and really want to replace it, the cash-for-clunkers program could be for you. The car shopping is done the normal way, and the dealer will help you get the credit.

Be sure to shop for the best auto loan you can find, using the manybanking.com search tool. Right now, the best loan rates come on 36-month deals, according to the loan survey. Those loans average about 6.8 percent, but many credit unions and banks beat the average. Bank of American (Stock Quote: BAC), for example, has a 36-month deal at 4.54 percent, while National City Bank (Stock Quote: PNC) offers one at 4.83 percent.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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