by Aniruddha

Created on: October 15, 2009   Last Updated: October 22, 2009

"Cash for Clunkers" is a colloquial term for U.S. Government for Car Allowance Rebate System (CARS). It was a unusual government program to provide incentives to U.S. residents to purchase new and more fuel efficient cars while trading in the eligible cars and to provide a stimulus the to auto industry.

While the program sounds great and it seems that this initiative would benefit all, the tough conditions imposed by the government to participate in this program resulted in no long term gains for the people or the automakers. Lets take a look at these conditions.[1]

* Vehicle must be less than 25 years old on the trade-in date.
* Only the purchase or 5 year minimum lease of new vehicles qualify.
* Generally, trade-in vehicles must get a weighted combined average rating of 18 or fewer MPG (some very large pickup trucks and cargo vans have different requirements).
* Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in.
* Trade-in vehicles must be in driveable condition.
* The program runs from July 1, 2009 until August 24, 2009
* The program requires the scrapping of the eligible trade-in vehicle and that the dealer disclose to the customer an estimate of the scrap value of the trade-in. The scrap value, however minimal, will be in addition to the rebate, and not in place of the rebate.
* The new car bought under the plan must have a suggested retail price of no more than $45,000, and for passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 mpg.

A buyer driving a 25 year old intends to drive the car to the road. Given an option he would prefer to get an used car instead of a paying thousands of dollars for a new car. As buying an used car is not an option when participating in the "cash for clunkers" program, he would end up with an auto loan which probably he cannot afford. He will also be paying taxes on the money that was received from the trade in. Effectively instead of the benefits of $4500 after the trade in, he is left with $3000 after taxes assuming he falls in the 30% tax bracket. Now here is the worst part. Before "Cash for Clunkers" program was announced the dealers would throw in many goodies like auto transmission, power windows, air conditioning, etc worth approximately $3000. After the launch of the program the buyer had to pay for these accessories. In conclusion, the "Cash for Clunkers" program did not work for the buyers. They ended up with less value for

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