Although the federal government and Obama would like you to think that you are getting a good deal by receiving $4,500, the fact is that anyone who falls for this rip-off scheme is losing tons of money! The government is counting on the fact that most people are too ignorant or stupid to do the math. So, let’s go through a typical scenario.
Assumptions:
You have a Chevy Suburban that is completely paid off and owe no debt on it. It gets about 16 mpg, so it qualifies for the program. Your monthly mileage is 1,000 miles per month. At current gas prices at an average of $2.50 per gallon, this equates to a monthly gas expense of $156.25.
You trade-in your vehicle for one that gets 32 mpg, DOUBLE THE GAS MILEAGE! (Although this is highly unlikely, since most new vehicles get in the range of 20-28 mpg, we will use a higher mpg to show that even if you got a significant increase in mpg, you still would not be saving money). With the same monthly mileage at 1,000 per month, and same cost of gasoline, this equates to a monthly gas expense of $78.13. So in essence, you are saving $78.13 per month.
Now let’s look at your costs and expenses. That new vehicle would cost probably about $25,000. With the Cash for Clunkers program, you save $4,500, bringing the cost down to $20,500. Most people do not have the cash lying around to avoid a loan. So the vehicle would need to be financed. Most auto loans are for a 48 month period at about 7%. This would make your monthly payment $490 each month. That is, if you actually have a job (or income) to qualify for a loan.
Result:
Even if you plan to keep your vehicle for 10 years, you are still averaging a vehicle cost of $196 per month which is much greater than your $78.13 per month savings. So over the 10 year period you would be LOSING $117.87 each month. Of course this does not factor in the increase of expenses such as higher insurance premiums or increase of gasoline prices.
In order to break even, if you travel 1,000 miles per month, you would need to keep your new car for 25 years! Even if you travel 2,000 miles per month, it would still take over 12 years to break even. And again, this is not factoring the increase in gasoline prices or initial higher insurance premiums.
Bottom Line:
For most people, the Cash for Clunkers program is a government sponsored scam. A few people would benefit, such as those who travel or commute an excessive amount of miles each month, putting on about 60,000 miles a year. However, how many people do that; how many people actually put over 300,000 miles on their personal vehicle in less than 5 years?
Related posts:
I think that you are so right about this program. I have a vehicle that is completely paid for and if I were to trade in ” my so called clunker vehicle”, yes I would be getting a nicer vehicle but I would then also be in debt to pay for the higher interest rate or insurance on the vehicle. Not only that, I would have to pay for the rest of the vehicle that clearly will cost more than the max amount that is even allowed. Why would I want a vehicle that I would have to make payments for something nicer when I have a vehicle that works just fine and is completely paid off?
It seems to me that if you want to further yourself in debt, then this program is perfect for you. I like the vehicle that I have and it is completely paid off and I will not participate in this program, simply because it will put me in debt even with the incentive that they are offering.