As you may have heard a new temporary government program has been working its way downstream to consumers over the last month. Well, the long awaited "Cash for Clunkers", officially known as the "CARS" program, has arrived and is full swing. Visit this link for exact details from the government.
Initially, this program sounded like another attempt from the government to influence our spending habits, contribute to dragging ourselves out of the current economic pitfall, and falsely prop up our economy only so it can fall again in the future one day. Despite part of this being true, they are trying to influence our spending habits, the rest I was surprised to find was not. This program truly is a way for the government to get old cars off the road and make more fuel efficient vehicles readily affordable for the average consumer.
The first indicator of this fact, at least to me, is that the government is not attempting to re-use or re-sell the vehicles that are turned in. Instead they are destroying and recycling them for scrap metal. I know that many of you are probably cringing right now, but in a way this really is a good thing. If they leave the cars in circulation are they really doing anything to help the environment, not really. Instead, by removing them from the market they are sending a message to the public that driving these types of cars are not acceptable, we all need to be more conscious of the MPG that we are getting in our car to limit pollution in the environment.
The second indicator pertains to some of the rules that they have enforced on the program. For instance, you must have proof that you have owned the car for over one year, have had it insured for one year, it must be 25 years old, and it must get less than 18 MPG. These rules send a message to me that they are not simply running this program to prop up a failing auto industry, which may be partially true, but instead are genuinely committed to replacing the autos that people use as everyday drivers that get horrible gas mileage.
When analyzing the program you may begin to think that no one will actually save that much money, but lets do some math. Assume that you are purchasing a new car for $17500 and your trade in is over 25 years old, gets less than 18 mpg, and qualifies you for the $4500 rebate. Bear in mind that this rebate does not interfere with any pre-existing offers that may be occurring.
New Car: $17000
CARS Rebate: -$4500
Dealer Cash back: -$3500
Total Car Price: $9000
This may not be as cost efficient as modifying your existing vehicle to improve efficiency; however, if you can manage to pull out $9500 you could potentially turn a car with almost no value into a brand new much more fuel efficient vehicle.
If we consider this cost in comparison to what you will save on gas using a vehicle that obtained 14 MPG that you planned on having for 5 more years traded in on one that gets 24 MPG, this is what we would get:
Average Fuel Cost: $3.00
Average Mileage Per Year: 15,000
Plan to Own Vehicle: 5 years
Average Per Year Savings*: $1339
5 Year Total Savings: $6696
Time to Recoup Investment: 6.5 years
Therefore, we can see that if we used this program to improve the fuel efficiency of our vehicle by 10 MPG we would save approximately $1339 per year on gas alone (not counting the maintenance that would be involved with the older vehicle). On a similar note in order to recoup the total $9000 spent it would take us only 6.5 years, which is most likely longer than the initial car would have ever lasted.
To look at this equation from another point of view:
Average Per Year Savings*: $1339
Average Per Month Savings*: $111.58
Monthly Payment**: $181.36
Cumulative Amount Paid Per Month: $69.78
Therefore, we understand that if we did trade in the older vehicle for a newer one that our cumulative amount paid per month, after subtracting the amount saved on gas using the above scenario, would only be approximately $69.78. Worth it? I would say yes! If you can cut three restaurant meals out of your month you can afford a brand new $17000 car!
*accounting for only fuel costs
**Calculated on 60 month lease with 7.74% interest rate and $0 down.