Sunday, June 21, 2009

Cash for Clunkers: A Yugo or a Prius?

The cash for clunkers bill has now has moved through Congress and looks set to be signed by the White House. The bill has improved while in Congress (the initial proposal allowed for a $3,500 credit even if your new vehicle only resulted in a 1 mile per gallon improvent over your clunker), but remains flawed.

Congress hopes that this bill will stimulate 500,000 new car purchases (down from an original estimate of 1-2 million). While possible, auto industry analysts indicate that 250,000 purchases would be more likely.

According to the Edmunds.com CEO - "A program intended to stimulate new car sales should target people in the market for a car, but the program does not. The only people who qualify are those willing to take no more than $4,500 for their current car and immediately buy a new one — quite a narrow profile."

I completely agree - you have to be the owner of an old gas guzzler that is practically worthless AND have the financial capacity to buy a new car quickly. There very, very few people in this category.

Obviously, if your car worth more than $4,500 the cash for clunkers deal is not for you. If you want to buy a car you'd be better served by doing a traditional trade or selling it yourself.

One of the areas of this program that is ripe for fraud is what happens to my old gas guzzler. I give the keys to the Dealer X. Dealer X gets his check from the government for $3,500 to $4,500 when a local junkyard validates that my car has been crushed. Maybe it's the cynic in me, but I suspect junkyard owners and car dealers might see an opportunity to "crush" phantom cars while shipping the real cars overseas. Someone might look at my old gas guzzler and think "Well, it's still running. Why should I crush this car?". I hope that I'm wrong, but this seems like a loophole big enough to drive a Suburban through.

Cheers!

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