Cash for Clunkers, Rest in Peace

The cash-for-clunkers program is coming to an end after a $3 billion outlay of taxpayer funds for several hundred thousand vehicles that were in running condition but burned more gas than Congress thought vehicles should. The program has been proclaimed in Washington as a huge success, so huge that Congress tripled the initial outlay for the program.

The program allowed anyone with a working, insured vehicle of a certain age and getting 15 miles per gallon or less to trade it in for a new vehicle getting at least 4 mpg better mileage than the trade-in. Uncle Sam would subsidize the trade-in at a rate of up to $4,500 (if the new car got 10 mpg more than the old one). For drivers of older-model SUVs and other gas guzzlers, it sounds like a good deal. A 10-year-old gas guzzler will probably never again command $4,500 at trade-in.

But there are also long-term costs. The buyer will need to pay for the new vehicle. Let's assume the new car costs $20,000. With your inflated-value trade-in you'll still owe $15,500. If you pay that back over five years (not unusual for car loans these days) at 6 percent interest, you'll be making payments of nearly $300 a month. Over the term of the loan, you'll pay $18,000 for that vehicle, plus the $4,500 from Uncle Sam, and pay a total of $2,500 in interest. If you cut the term to three years, you'll save about $1,000 in interest, but your payments will be much higher.

But aren't you saving on gasoline? Yes. At the current cost of gasoline (about $2.50 a gallon), you'll save $800 a year, if your trade-in got 15 mpg and your new car gets 25 mpg. If gasoline goes to $4 before your loan is paid off, you'll save $12,800 a year. That will get you three or four monthly payments on your loan. Your bottom line will be an expense of $14,000 ($18,000 in payments minus $4,000 in gasoline savings). You'll need to keep the vehicle four more years (until it's 9 years old) to get a positive return on investment when your savings on gasoline exceeds your outlay for the purchase.

Advocates of the program point to recall of GM workers to fill orders for new cars as a positive result of Cash for Clunkers. That's good, but it might be only a temporary reprieve for the auto industry. It's likely that Cash for Clunkers increased current demand by attracting buyers who would have ordered cars next year or the year after. If we see a sales dip in the next couple of years, it might be because thousands of buyers are paying off their "clunkers" loans. The retirement of older gas-guzzlers will pollute the planet less and reduce dependence on foreign oil, advocates say. That's true, but the impact will be minuscule in the big picture.

I have been unable to take advantage of the clunkers program. My 15-year-old car is old enough to be a clunker, but it still runs well and gets over 30 mpg on the highway. And then there's the issue of making those monthly payments — or even getting a loan when you're unemployed.