As we noted last week on “The Money Show”, Congress has passed  a so-called “Cash for Clunkers” piece of legislation which, in essence, gives consumers who trade in their older, lower mileage vehicles for a new, higher mileage vehicle, vouchers worth up to $4,500.  Following is a recent article from the Wall Street Journal that gives a good overview of – and the very possible major drawbacks of – this legislation. 

However, before you run out and trade in your current vehicle to take advantage of these vouchers, keep the following two points in mind.  First, despite what proponents of the legislation say, it is our opinion that this legislation will have an extremely minimal effect (if any) on improving the environment.  Second, and most importantly from a financial standpoint – if your current vehicle is a good, reliable and viable vehicle (i.e. one you can reasonably expect to get another two, three or more years from without frequent and/or costly repair costs – than trading it in to take advantage of this legislation  will most likely  prove to be an unwise (and possibly, a very unwise) financial decision.

Car Dealers Bank on Clunkers

Owners of vehicles that get less than 18 miles per gallon will receive a voucher worth up to $4,500 if they scrap their car and buy a new, higher-mileage one. The program is modeled on similar efforts that have boosted sales in Europe and is aimed at raising the overall efficiency of the nation's vehicles.

"This is a great excuse to contact somebody that was in a week ago, six weeks ago, six months ago," and try to sell that person a new car under the program, said John McEleney, who owns three dealerships in eastern Iowa and heads the National Automobile Dealers Association.

The $1 billion appropriated in the bill is enough to fund about 250,000 vouchers for new-car purchases. It isn't certain, though, that customers will rush to trade in their clunkers.

Because the program requires dealers to scrap the vehicles that are traded in, the most a trade-in will be worth to a customer is $4,500. So only people who own cars worth less than $4,500 -- or $3,500 if they don't trade up to a car with substantially greater efficiency -- are likely to participate in the program.

Moreover, people driving older cars worth that little may be unable to afford a new car, even with the voucher, said John Wolkonowicz, an analyst at forecasting firm IHS Global Insight.

And because gas prices are far lower in the U.S. than in Europe, customers don't have as great an economic incentive to trade up to a more-efficient vehicle.

The bill gives the National Highway Traffic Safety Administration 30 days from the date it is enacted to come up with rules for the program. NHTSA needs to devise ways to register participating dealers and make sure they scrap the cars traded in under the program, so they don't turn around and resell them.

Dealers were optimistic Friday that the bill would help them sell more vehicles, especially small, low-priced ones that get good mileage. "Almost every manufacturer has that entry-level, good-gas vehicle that would qualify," said John Garff, chief executive of Ken Garff Automotive Group of Salt Lake City.

Even if customers end up not qualifying for the program, dealers say the publicity surrounding cash for clunkers might be enough to get them into a dealership and to think about buying a car -- something that has been lacking in recent months.

Customers trading in an old sport-utility vehicle or a pickup truck may have the easiest time qualifying for the $4,500 voucher, since the bill requires an improvement of greater than 10 miles per gallon for a new car, five for a new light truck or SUV, or two for a large light truck.

To qualify for a $3,500 voucher, customers need an improvement of four miles per gallon if they buy a new car, three for a light truck or SUV, and one for a large light truck.

New cars purchased with a voucher must get at least 22 miles per gallon, light trucks must get 18 mpg and large light trucks must get 15 mpg.