Cash for Clunkers ... do the math
October 4, 2009 2:53pm CST
I got this in email and I can't vouch for the accuracy of the facts given here, but it is a good reminder that "there's no free lunch". It also calls to mind President Reagan's words to the effect that the scariest words ever heard are "I'm from the government and I'm here to help you". From a real "Car Guy" out in Los Angeles , CA . ______________________________________________________________ SO....you took FEDZILLA up on its offer of $4500 dollars to trade in your old "Clunker"(interesting choice of words)? Well, let's see who got the best of that "deal"... If you traded in a clunker worth $3500, you got $4500 off for an apparent "savings" of $1000. You could have gotten $3,500 if you had just traded the car in. So you really are $1,000 ahead (depending on your clunker's value) at this point. Not too bad... However, you WILL have to pay taxes on the $4500 come April 15th (something that no auto dealer will tell you). If you are in the 30% tax bracket, you will pay $1350 on that $4500. So, rather than save $1000, you will actually pay an extra $350 to the feds. In addition, you traded in a car that was most likely paid for. Now you have 4 or 5 years of payments on a car that you did not need, trading in a "clunker" that was costing you less to run than the payments that you will now be making. Even if you save $1,000. dollars a year in gas due to better mileage, you're still gonna be in the red for five years....hello? But wait, it gets even better: you also got ripped off by the dealer. For example, the month before the "cash for clunkers" program started, every dealer here in LA was selling the Ford Focus with all the goodies including A/C, auto transmission, power windows, etc for $12,500 because competition was stiff due to poor sales from the stalled economy. When "cash for clunkers" came along, they stopped discounting them and instead sold them at the list price of $15,500. So, you paid $3000 more than you would have the month before. Honda, Toyota , and Kia played the same list price game that Ford and Chevy did. Now let's do the math... You traded in a car worth: $3500. You got a discount of: $4500 --------- Net so far +$1000 But you have to pay: $1350 in taxes on the $4500 -------- Net so far: -$350 (that's minus...in the red) And you paid: $3000 more than the car was selling for the month before ---------- Net Loss: -$3350 We could also add in the additional taxes (sales tax, state tax, dealer prep, etc.) on the extra $3000 that you paid for the car, along with the Five years of interest on the car loan; but let's just stop here while you kick yourself. Suffice it to say that those costs will be much higher than any savings you get from "better mileage". So who actually made out on the deal? FEDZILLA collected taxes on the car along with taxes on the $4500 they"gave" you. The car dealers made an extra $3000 or more on every car they sold along with the kickbacks from the manufacturers and the loan companies. Manufacturers got to dump lots of cars they could not give away the month before. Lots of good or repairable used cars got taken off the market, crushed and sold as scrap metal to (ready for this?) CHINA ! (Look it up...) And the poor consumer got saddled with even more debt that they cannot afford. FEDZILLA'S merry men (who promised that people making less than $250,000 would pay "not one red cent more in taxes") will make millions in new tax revenues after convincing Joe Consumer that he was getting $4500 in "free" money from the "government" In fact, Joe was giving away his $3500 car and paying an additional $3350 for the privilege. Chicago politics gone global... with an agenda.. If you find errors in this math, please let me know ...being a simple guy, I'm always willing to learn new things; and if you took "advantage" of the Clunkers deal, I have some swamp land down in Florida that's for sale...
• Cambridge, England
4 Oct 09
While I am in agreement in principle with both you and Stealthy, I'm not in a position to check your math. Here in the UK we have a similar scheme ... scarily similar, actually - $3500 = (give or take a bit) very close to £2000, so who is copying who? ... but we aren't taxed in quite the same way as you and the math in that respect would be somewhat complicated. On the face of it, the punter with a 10 year old car is offered a discount (a guaranteed trade-in) of £2000 against a new car. He/she does have to have owned the banger/clunker for a year and can only trade it for a new car which he/she is personally financing (I believe) ... or at least will be personally owned by them. Our insurance regulations are different from yours, too. It's actually quite hard to explain how but, in essence, the car and the driver are linked in a complicated set of restrictions that I pay more for here than you would have to do in the States. What is clear, however, is that, while many manufacturers are eager to take advantage of the scrappage scheme, their prices and deals are often made to look more favourable than they really are. Many manufacturers/dealers, for example, are offering even more on a new vehicle than the £2000 deal that the government guarantees - but, of course, it only works on selected models and versions. If you are prepared to haggle and set different dealers against each other, it has always been possible to drive a 'good bargain' (how good the bargain really is depends on how much you know about how low a dealer can really go in order to make his/her quota of sales for the month/quarter/year). Many people just don't want the hassle of dealing with the scrappage of a car that's over 10 years old and will seriously consider paying somewhat more for a new vehicle than they otherwise might have budgeted for (for a used car) if an option is getting rid of the old one at a good price and without all the comeback problems that might arise. The other thing I can't really comment on is how 'repairable' a car is in the US. Here (in the UK and Europe), there is a certain point where a car will cost more in a year to make it meet the required standards than it would cost to replace it with a slightly newer and more reliable car. I spent 3 months recently in LA - Beverly Hills, actually - and I have to say that, in that city, I saw not a few cars which would not have been allowed on the road in the UK. I know that California is probably one of the stricter States (closer to European standards) in this respect, as in many others, so it made me wonder about the safety of cars in the US in general! Here every car over a certain age has to undergo a yearly test which covers not only emissions but also everything down to the wipers! My impression was (and I could be wrong) that you can drive whatever you like so long as you are wearing a seatbelt (and your passenger is too), are not obviously smoking pot, talking on your cell-phone, driving on the wrong side of the road, exceeding the speed limit when the cop sees you and are capable of maintaining the speed you are doing (and a number of other things that would take too long to mention), you are OK ... unless you happen to cross a mean cop. I only ever encountered one of those (well, he wasn't mean ... only dutiful, I guess) at LAX. My friend wasn't wearing her seatbelt though I was (but it wasn't actually working, as the cop soon discovered). I was ordered out of the car and my passport was removed while my friend suffered a long oration. I did catch my plane (but I might not have done) and the 'fond goodbyes' were not quite as they might have been!
2 people like this
• United States
12 Oct 09
California has tougher emission laws, but as for cars themselves, they are not as strict as a lot. A lot of cars that are legal to drive in California I couldn't drive legally in Pennsylvania. The insurance here also is based on the driver and how much it would cost to replace the particular car, so if you have a more expensive car you pay more. In fact I only have the minimum coverage. That means basic medical and liability. Any damage done to my car I have to pay, but I could get that if I wanted to. Here it's 50 individual states with individual laws and you never know state by state what you will get until you buy the car.
• United States
4 Oct 09
You left out that the new car will have higher insurance premiums than the old one for the same coverage, probably much higher, and then one would probably feel the need to have collision when they probably didn't have it for the clunker which would increase the premium even more.
• Cambridge, England
5 Oct 09
In this country (UK) the insurance premiums for a newer car would probably be the same, if not lower. A newer car (of the same power) is seen as less of an insurance risk than an older one (in spite of the fact that it would cost more to write off). Our insurance tends to focus more on the capabilities (and risks) of the driver than on the ability of a car to destroy or be destroyed. Even though it is the car that's actually being insured, our insurance companies seem to charge according to the assumed capabilities of the driver. I suppose, in a way, that makes sense but it is still the 'car that I own' that is the most important factor rather than 'any car I might choose to drive' or the car itself (regardless of the driver). As far as I can make out, the principle is similar in the US but very different in the way it's applied.