3 Cash for Clunker Traps to Avoid

Shapecity · Aug 14, 2009

THE GOVERNMENT’S CARs program (better known as “Cash for Clunkers”) has been a huge success for manufacturers and dealers. Barely six days after its launch on July 24, the program had exhausted the $1 billion initially earmarked for reimbursements by the government and needed a refill. Nearly one million new cars were sold in July – a level not reached since August 2008 and up 16% from sales in June. Hundreds of thousands of gas-guzzling clunkers have been replaced with shiny new vehicles. Dealers have seen business pick up. Manufacturers are increasing production to meet a demand they haven’t experienced in years, and the Department of Transportation relaxed the program's rules to allow dealers to sell cars they don't yet have in stock.

But how about clunker owners? Not all of them are getting the great deals they had hoped the program would provide.

Here are three common traps that car buyers have been encountering under the Cash for Clunkers program – and how to avoid them.

1. Watch out for waivers
Fearing the government may not reimburse the $3,500 or $4,500 credits extended to buyers under the program, some dealers are putting buyers on the hook for that money. They’re asking buyers to sign waivers or purchase agreements, which stipulate that if the dealer doesn’t get reimbursed, the buyer will pay back the credit or return the new car. Some states’ industry associations, like the Minnesota Automobile Dealers Association and the Illinois Automobile Dealers Association, have published sample agreements (here and here) for their members’ convenience.

Watch out: The Department of Transportation explicitly states that buyers are under no obligation to sign such agreements. Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento, Calif.-based advocacy group, says an increasing number of recent buyers are reporting that dealers are demanding they sign such agreements, trying to collect money from the buyers because of denied reimbursements and, in some cases, threatening to repossess new cars if the buyers refuse to pay.

Pete Sander, president of the Illinois Automobile Dealers Association, says dealers are concerned with delays in reimbursements and rejected applications, most of which are caused by clerical errors. “The concern is we’re not getting applications approved in a timely manner,” he says. “Why put dealers on the hook?” The Minnesota Automobile Dealers Association did not return calls seeking comment. The National Association of Automobile Dealers, or NADA, said in an email that it has raised these issues with the National Highway Traffic Safety Administration.

2. Know your clunker’s trade-in value
Check your car’s trade-in value before you head to the dealership, and make sure a new car fits with your wallet and lifestyle. “If your car is worth close to the $3,500 or $4,500 cap, you’re almost always better off trading it in and buying a cheaper used car,” says Joe Ridout, a spokesman for San Francisco-based advocacy group Consumer Action. New cars lose as much as 30% of their value the minute you drive them off the lot. Buy a used car that’s still under warranty – say, a 2006 or 2007 model – and you’ll have let someone else pay for that depreciation.

3. Don’t forget to negotiate
Just because the government is giving you $3,500 or $4,500 for your clunker doesn’t mean you should let the dealer keep the full difference between your car’s manufacturer’s suggested retail price, or MSRP, and the invoice price. In other words: Negotiate.

Cash for Clunkers has taken some negotiating power away from car buyers. According to pricing data received from more than half of the nation’s dealerships, auto data aggregator Edmunds.com found that shoppers have been getting less of a discount since the start of the program. For example, the average discount on a new Ford (F: 7.81*, -0.09, -1.13%) Escape after the Clunkers program began has slipped to 5.2% off the MSRP, compared with 5.7% before the program got underway. Consumers are paying an average $261 more. A new Dodge Caliber sold for an average price of $17,368 before Clunkers, 11.7% off MSRP, compared with an average $19,181 after the program’s start, a discount of just 3.8%.
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Source: SmartMoney

BLAZER PROPHET · Aug 14, 2009

If the clunkers are being destroyed and/or discouraged from being resold, how is it one should expect a huge trade-in value?

WarriorFan · Aug 14, 2009

BLAZER PROPHET said: ↑

If the clunkers are being destroyed and/or discouraged from being resold, how is it one should expect a huge trade-in value?
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Depends on the car. I drive a 2004 Pathfinder. It's poor mileage would allow me to turn in in for 3500 in this program but I could get more than that by selling it or using it as a trade in.

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3 Cash for Clunker Traps to Avoid

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