Thursday, July 23, 2009

The Cash for Clunkers Program - a personal analysis

The government has passed a plan to buy back less fuel efficient vehicles to be replaced by newer more fuel efficient vehicles. I looked into it since I tend to drive older vehicles (currently my car is 17 years old). Information can be found on the government website appropriately named (I wonder if it is a paid position to come up with acronyms for the government?).

In a nutshell, if you have a fuel inefficient car, you can trade it in to be shredded and get up to $4500 off the price of a new car.

So let me explain my situation, my family has two cars. One is about 9 years old and will fit the entire family or 4'x8' sheets of plywood. It is my wife's vehicle and gets about 21 MPG with our driving habits. The second car is my vehicle, it gets about 21 MPG with my driving habits. You could squeeze our entire family in there but I am certain we would be violating seat belt laws and child seat laws. I wouldn't consider either of these cars clunkers, but my car is coming close. Part on a body panel is missing, the paint is fading and peeling, the AC doesn't work, and if I drive it more than 30 minutes in stop and go traffic the transmission shifts to 1st gear and stays there (I had this fixed once, it was a speed sensor gone bad, but since the vast majority of my driving is highway driving, I normally don't have a problem with it and it isn't worth it to pay another $400 for this).

For our vehicles to be eligible for the credit, they have to be less than 25 years old. Check, check on that one. This criteria makes no sense to me. Cars older than 25 years are undoubtedly less fuel efficient than newer vehicles. Some may try to say that they are worth less as well and the government is trying to not give too much away for free. Hold on though, if I read the program correctly, not only do you get the $4500 credit, but you also get the scrap value of your vehicle (which is probably only $50-100 regardless of the year the vehicle was made), since the dealer has to scrap the vehicle, he can't turn around and sell it. Besides the fuel efficiency issue, older vehicles also emitted a whole lot more pollutants than vehicles in the last 20 years. One last point, the number of vehicles over 25 years on the road still is minimal compared to the overall inventory of vehicles, so why not include all of them and get the true "clunkers" off the road.

Next, the vehicle has to have a new combined mileage rating of 18 or lower. Check for my wife's, it comes in at 18 (even though in actual practice she gets more than that). No go for mine, its 23. While I don't expect my car to get the same kind of mileage now as when it was new, even if my car in actual practice was only getting 13 MPG (due to neglect, bad computer, etc.) it still would not qualify. So the older more decrepit vehicle is not eligible, but the other still is. If I have to explain why this makes no sense, then just put all your money in an envelope and mail it to My Reputo 123 Blogspot Rd Fantasyland, AK 99000.

Next, be drivable. Check. This actually makes sense, no use paying money for a non working vehicle with the purpose of increasing the overall fuel efficiency of the fleet. Next, be continuously insured and registered to the same owner for the past year. Check. This is to prevent people from going out and buying a clunker from a junkyard and turning it in. Also, if you wanted to get a new "work" truck for your private property which wasn't registered or insured (since you only operated it on your private property), you wouldn't be able to turn in your old one.

So, at this point only my wife's vehicle is eligible. We don't have many criteria with which to choose. A) It has to seat the whole family B) It has to have room left over to pack stuff for a vacation. Some desireable qualities are C) It has to seat any other kids we may have (we have talked about how many kids we are going to have and the next family vehicle we buy will be able to seat everyone - and no, we aren't buying a school bus) and D) 4' by 8' sheets of plywood and drywall should be transportable without damage (I like to do lots of projects and don't want to pay extra to have stuff delivered).

Now for the new vehicle that we would buy, we have some criteria to meet. First the vehicle has to get a combined 22 MPG or more. Well, scanning over the list of vehicles that meet criteria A & B above, there are a few choices. If I add in D, the list is down to 3. If I add in C, there are no choices. So going off of the 3 vehicles that I could find that meet my criteria of A, B, and D and the government's criteria of 22 MPG or better we would be getting $3500 (to get the full $4500 we would have to have a vehicle that gets at least 10 MPG more than our present or 28 MPG and none of the ones that meet criteria A & B meet that). In return our new vehicle would probably be getting 4-5 MPG more in actual usage than our present vehicle.

If one's only goal is to increase the fuel efficiency, then this is a no brainer. Buy it. In fact, you would end up buying a new vehicle every year for the rest of your life. For the rest of us, this is about total cost. Right now, my vehicles are paid off. No monthly payments, only maintenance expenses.

If I assume 10,000 miles driven each year (which is high for my wife's vehicle), then (10000/21 - 10000/26)* $2.50 (current price of gas) = $228.94 of savings a year. In order to realize this savings, we would have to spend a minimum of $20,000 - $3500credit = $16,500. That comes out to a return on investment of roughly $230 / $16,500 = 1.4% on a depreciating asset. This also means that if we got a loan for this vehicle, we had better be paying an interest rate of less than 1.4% or we are losing money (and that is with the $3500 credit). Even if I adjust for the increased maintenance costs of our current vehicle, the percentage changes very little (see this post for another more complete analysis of car ownership). If we assume that gas cost $8.00 a gallon, the ROI is 4.4%. Better, but nothing to write home to mom about, especially for a depreciating asset. So we aren't going to go for this deal.

Hypothetically, say for a moment that my car was eligible instead of my wife's. I could by a new compact vehicle with 31 MPG combined, that would be eligible for the $4500 credit, and since I do mostly highway driving I would probably be getting closer to 34 MPG. This would equate to a savings of $455.18 per year at $2.50 gas. I roughly priced out the vehicles at around $15,000-$4500 credit which means my ROI is 4.3%. As I said before, this is better (not great). However, once I combine that with the fact that I would have a car with CD, AC, working transmission, etc. my creature comforts improve and I might be more inclined to do this.

So what have I learned. The government has a program to stimulate the economy (buying new cars), bail out the auto companies (buying new cars), improve fuel efficiency (buying new cars, scrapping old ones). For my family, the program helps me stimulate the economy (deciding to investing money for a better return on paper assets). The other goals aren't achieved. Of course, I would be stimulating the economy anyway with my spending and investments if this program was never passed. So basically all it has done for me is allow me the joy of a 5 minute mathematical exercise. What is it going to do for you?!

1 comment:

  1. Since you're at work all day, I bet you haven't heard the competing car commercials over this deal. One company is lauding the $4,500 rebates and bragging about how they have all these cars that fit the criteria for you to buy. The second car commercial is frank about how the program is a scam and they'll just give you the credit/swap with no government criteria to meet. I'm sure there is a catch in their program as well, but isn't it funny that a car commercial is advertising the stupidity of the government clunker program?