Cash for Clunkers Isn't a No-Brainer

Since the guest post on Cash for Clunkers, the program has run out of money and is on life support for the time being (will more money become available? when?) Anyway, several readers pointed out on that post that saving a few thousand dollars by trading in an old car wasn't really a great deal since you were likely trading a car that was paid off for a new car (including potential debt) that would be much more expensive. Good point! Check out this email I received from Insurance.com:

With many considering a new car purchase under the CARS program, it’s important to take insurance costs into consideration. For example, if you have a 1999 Ford Explorer 4WD to trade on a new car – and you're ready to give up driving an SUV – there are plenty of popular, fuel-efficient models to consider. With an average annual insurance bill of $1,390, based on Insurance.com RateWatch data, you'll want to carefully consider your choices. According to Insurance.com The 2009 Hyundai Sonata has an average auto insurance rate of $1,770, an increase of $380 year. At the other extreme, the 2009 Scion tC adds $1,460 a year to your insurance costs, and it's unlikely you can make that up in what you save on gas. Here are some more examples of how car insurance costs might hinder the savings from CARS (listings are: car model, annual insurance rate, and coverage increase):

• 2009 Toyota Corolla/LE/LXE, $1,997, + $607 year
• 2009 Kia Spectra, $2,120, + $730 year
• 2009 Honda Civic EX, $2,215, + $825 year
• 2009 Ford Focus, $2,248, + $858 year
• 2009 Chevy Cobalt, $2,285, + $895 year
• 2009 Scion tC, $2,850, + $1,460 year

Wow. If your insurance costs alone go up $900+ a year, it won't take long before a few thousand dollar "savings" is long gone. Then again, maintenance and gas costs should lower, right? :-)

My take is that if you were going to get a new car anyway (within a year or two), using the cash for clunkers program is probably a good idea. But if you have a vehicle that's paid off and has lots of life left, then it's probably not worth it.

Does that sound right to you?

Comments

[Angie]

These numbers for "average" cost to insure sound incredibly high. I'm under 25 and drive what they consider a "sporty" car and pay hundreds, if not 1,000, less then all those listed. Either these numbers or fishy or there are a lot of high risk accident prone people driving up the average.

[Apex]

I agree with the above comment. Those rates seem really high. Is that what other people are paying? Granted I am 38 married with kids but we have a 2002 Nissan Maxima and a 2002 Honda Odyssey. Full coverage with collision and comprehensive ($1000 deductible) and all of Minnesota's other required insurance which includes Personal Injury Protection, Liability at 300k/500k/100k, uninsured motorirst and underinsured motorist.

I pay about $450 per year on per vehicle (state farm is my insurance company BTW, not exactly the cheapest company around) and we drive over the 7500 miles per year that would get you a discount and we live in Minneapolis suburbs area which is the highest insurance metro area in the state due to all the traffic obviously.

If I had to pay $1,500 per year per car instead of the less than $500 per year per car that I pay now I think I would just get a bycycle. Man do people really have to pay that rate of insurance? I would never buy a new car if those were the insurance rates. I would just drive a beater and carry liability only.

[FMF]

Angie/Apex --

Maybe they didn't shop around and ask for discounts? :-)

[David R.]

I'm 24, male and have never had an accident. I pay less than $400 per year for my 1997 Ford Escort with 108k miles. I couldn't imagine shelling out anywhere close to $1,500 a year for car insurance.

[Torrey]

I think the problem will be folks who just use this as a reason to get a new car regardless of whether it makes financial sense for them.

We all know people who anytime some company has an enticing deal falls for it hook, line and sinker.

I'd rather drive my paid for beater.

[Jim]

I also have to agree that those 'average' numbers are very high. I think that they are using high coverage levels when they figure the costs, but still I don't think that could account for >$2k bills. My wife and I pay $1400 for 2 cars with full comprehensive and extra high liability coverage.

Does anyone here pay >$2000 for car insurance??

Yahoo cites insurance for a Kia Spectra at $972, less than half what Insurance.com said:
http://autos.yahoo.com/2009_kia_spectra_lx-price/

[george]

Who the heck pays that much for insurance!!!! Maybe you need to shop around... Unless were talking about a 18 male driving a new vette!

[Eugene Krabs]

I'm a fairly boring driver with a Corolla, so the numbers are high to me as well. But who knows, maybe not to others.

In any case, I agree that the Cash for Clunkers program is not as good as it seems. This has been raised in discussions elsewhere as well. Ultimately, it is what FMF said: If you're in need of a car this year anyway, using this program isn't a bad idea. However, if your current car is still fine, ignore this "deal".

[Jeremy]

These numbers seem a bit high, bit not crazy high. A lot has to do with state laws. For instance, New Yorkers pay much more than Floridians.

[Tim]

To me, I can't believe that all the people jumping on this program understand exactly what they are getting. You have to GIVE them your junker, you get NOTHING back for trade. Even a total beater car usually sells for $500 or likely more if it is not totally a junker. Even trading, they have "drive, tow, or push you clunker" trade in deals all the time. The trade in is just one part of the negotiation. Heck I bet the scap value is at least a few hundred dollars. And then, you jump from no car payment to a loan on a brand new car, plus much more on insurance, as mentioned. And the new car is going to lose value significantly as you drive off the lot. Most cars lose about 20-35% of value in the first two years.

Better to sell your vehicle on you own, and buy a 2 year old, nicer car than you can buy new, that has already depreciated nicely, in my opinion.

Also, a lot of these dealers are going to take a bath when they pay out up front, then find out the fine print a bunch of junkers don't fit the guidelines.

[jeffinwesternwa]

Tim, the DEALERS will take the hit, it is they who get the vouchers, so getting $4500 for a car that might only fetch $1K~ in trade isn't bad, provided you deal HARD on the new car!! paying MSRP, or slightly below sticker even is NO deal on a new car....my last two cars i paid LESS than invoice dealer COST (not MSRP)..btw my sporty Miata w/ 300/500K liability, comp, collision, tow/labor and $1K deductible costs less than $600 a YEAR to insure via USAA!

[kitty]

"•2009 Honda Civic EX, $2,215, + $825 year "

Weird. I pay under $1000 for my 2006 Honda Civic EX. I use State Farm which is not the cheapest company out there. Now, it is 2006, but somehow I doubt that the insurance on the new Honda is quite that much higher. I bought mine new anyway, so if what you say is correct the insurance on a new Honda has more than doubled. OK, I have a bunch of discounts like accident-free (yes, I totalled the previous car but my insurer forgives one accident after 9 years of accident-free driving), but on the other hand my deductibles are average, not too high, I include perks like car rental.

Plus, I live about an hour drive from NYC, which means my insurance is higher than in most areas except for the city itself. For example, when I move to Westchester county from Dutchess (another hour North) many years ago, my insurance doubled.

Not sure where you got your numbers. BTW -- I think it is a good deal: the "clunkers" aren't worth much anyway and probably wouldn't fetch much on the market. They'd probably break in a year or two anyway. So getting $4500 voucher for junk is not that bad. Assuming one bargains with the dealer as jeffinwesternwa said. Nobody pays MSRP, at least nobody I know. OK, maybe some "hot" cars like Prius are an exception, but for other cars you can often pay a whole lot less. Especially now.

[Insurance.com]

We just wanted to clarify that the examples above are annualized rates based on the lowest car insurance quotes issued to consumers by Insurance.com this year. These are quotes for full coverage on brand new 2009 cars, most with $250 deductibles, as that is what many lenders require.

Car insurance rates vary by state and individual driving history. The amount of your deductible can also impact rates. If you have higher deductibles, your rates would also be lower than the averages listed above. And, rates by state vary quite a bit, too.

[Bill]

If extra insurance costs don't steer you away, how about extra excise tax? In MA the excise tax is barely noticeable after 10 years, but based on 100% of value for 2010 models and 90% of value for 2009 models. Excise is 2.5% of the value for the year...so on $30k you get an extra $750 bill in the first year.

And now what about sales tax??? (just raised to 6.25% here in MA)

[Marc B.]

Here's another thing to consider in your calculations: The cost of the car itself. I own an SUV and my wife hates it. She wants me to get a more fuel efficient car. My arguement is that it's not fiscally prudent to do so (even assuming that insurance would be the same on my current car vs the new fuel efficient car).

Current Car Payment: $0/month

New Car Payment: $350/month ($350 is a wild guess, I have no real idea what a monthly payment would be)

Gov't Clunker Incentive: $4,500

Annual gas savings: Since I have a 2.35 mile commute, my annual gas savings are negligible. However, for sake of arguement, let's assume $500

Breakeven: 14 months Anytime after that, it's a loss!

[Mike]

Why does FMF overstate the numbers in just about every post he makes to make his tiny arguments seem better?

These insurance numbers are OBVIOUSLY wrong

[FMF]

Mike --

These aren't my numbers. They were sent to me by Insurance.com.

You may want to actually read the post sometimes...

[Mike]

FMF, they are obviously wrong, everyone on here is in agreement about this.

There are probably outliers that bring those costs up a lot, just use common sense and think about how much you pay and what type of car you drive.

Why would a 2009 Honda Civic cost $2,200 for insurance a year when its one of the safest and cheapest cars you can buy?

I read the post and easily could tell these numbers are not in line with the 'real world', please don't use scewed numbers to justify lame posts that should have never been done because you have nothing else to talk about.

[FMF]

Mike --

The point is still true even if the numbers are high -- that turning in your clunker for a new car isn't a good financial move due to all the extra costs (including insurance) that are associated with a new car.

By the way, you seem really bitter. If you dislike my posts so much, there's no reason for you to keep reading them...

[Mike]

I like most of your posts when they are not common sense things like this.

Obviously its cheaper to keep a car that is worth less than it would be to get a new car.

I think you are underestimating your audience, from reading posts it seems like most know basic stuff like this. I think we want to actually learn some new stuff that might benefit ourselves.

From your posts lately, I am going to take your site off my list due to this.

[FMF]

Mike --

I have almost 14,000 subscribers (check the box on the right) spread all across the spectrum -- from newbies to seasoned money managers far better than I am (if you read their comments, you'll get even more out of this site than just reading what I say.) Anyway, I try to mix around the level of the posts so that there's something for everyone on a regular basis. This means that there will be posts that aren't for you from time to time.

That's what feedreaders are for. You can see what a blogger writes and check out the posts you're interested in. I subscribe to over 200 sites covering topics from finances to business to soccer to a wide range of other personal interests and probably the most I read of any one site is 50% of what they write -- the rest simply doesn't interest or pertain to me. Maybe you can/should consider doing the same.

[dcs]

It's true there are a lot of ways to make a mistake with the CARS program, and I suspect many people are doing just that. Of course, they are probably the same people that make mistakes when buying a car without the CARS rebate.

FMF is on the right track though in regards to it possibly being a good deal for some. In fact, for those with cash-in-hand, an "extra car" fully-depreciated clunker, an older, still-depreciating daily driver due for replacement in a couple of years, and the willingness to forgo the hottest new model (in other words, cheapskates like me), cash for clunkers can be an absolutely unbeatable deal.

Let me outline a deal that I was considering before the program was put on hold that may illustrate how the cash for clunkers might be a much better deal than you think (for some people).

I have a clunker pickup, worth between $500 and $1000 that I paid $700 for several years ago. I also have my daily driver, a 2002 compact sedan with 115,000 miles slated for replacement in or around 2012 when it will have about 150k miles on it. Currently the vehicle fund, which pays maintenance and repair costs as well as car replacement cost, stands at about $12,000.

Obviously, when the clunker program came out the idea of getting $4500 for the old truck worth much less was appealing, especially since my needs have changed and I rarely use it. The trans has also been hinting around that it would like to retire. So I started looking around.

It's true, many new cars are still not a great deal even with clunkers rebates (compared to used cars I mean). However, I managed to find a model that would fit my needs and to an extent replace some of the lost truck utility. It is one I planned to consider when I replaced the current sedan in a couple of years. A totally redesigned model is already on the lots, so the 5-year-old-design '09s (I prefer to think of it as "fully-debugged") have a $2000 manufacturer discount. Also, the one I located is a manual trans and lacks some popular options that many people want but that I can (and do) happily live without. I suspect the dealer is somewhat motivated to unload it.

All this feels like it should be a good deal, but I'm an FMF reader so you know some research and number crunching were in order. I discovered that my current car will be worth about 40% of what it is now, or ~$1000 in 2012. It also needs a new suspension soon, a ~$500 expense I can avoid if I get rid of it. Unloading it now will mean it will be worth $1400 more than in three years, and I will have an additional $500 in the car fund, so a total value of $1900 to use towards the new car today that would be gone in three years.

Interest is not a factor, because if I can't pay cash I would not buy.

The new car in question has depreciation rated as "average" by Kelley Blue Book and Consumer Reports. I looked at the value of a three year old example in good condition with 36,000 miles and they come in at around $16,500 equipped the way the one I was looking at was equipped (which is to say - base model, very limited options). Insurance on the new car will be slightly higher (<$100/yr), but I won't have to insure two cars anymore which will partially offset that cost.

So here's the deal. The online sites (Consumer Reports, Edmunds, KBB, etc) say that I should be able to get the new car for my trade + $4500 clunker credit + Mfg Rebate + ~$14,000 cash including tax and title (remember tax is deductible as well, but this year only, although I didn't include that ~$300 savings in these numbers). If I wait three years, I can buy the same car as a nice 3 year old example for about $17,500 including tax, less about $1000 I can get for the old car then, so $16,500 cash. Sales tax will probably not be deductible. I assume the pickup will be at junk value, <$200.

So what's the bottom line? By my figuring, I can get a brand new car now for over $2000 less cash than what I can get the same car for used in three years. In fact, in three years, if depreciation rates hold, it will still be worth more than I paid in cash + what my trade would be worth at that time.

If you can find a demo of the car you want which can be titled as new (so it gets the clunker credit and qualifies for all rebates), but has lower value because it's technically used, the advantage goes off the charts. Two weeks ago I found one '09 crossover, a demo with <5000 miles, sticker of $25,000 new, with a tag in the window for $15,000 with rebates (this is BEFORE negotiation). Add the clunker and my $2400 trade and if I had wanted something that large I think I could have driven it home for less than $9000 cash. Those deals will be tough to find now though. Those cars are probably all gone. However, given the right circumstances and the right cars, the math can work out for some people. CARS is not automatically a total bust financially.

[Christy]

Nice post, dcs.

Also like that insurance.com commented to explain it's numbers.

[aif]

Really good post, dcs.

I also think that if the right research is done it is quite possible to get a good deal.

But most people will go ahead and buy a new car, leaving the numbers for later. By the time they realise they have ended up paying more overall, it will be too late.