Who Gets the Cash for Your Clunker?

Last Updated Jul 10, 2009 3:19 PM EDT

I've got some bad news for drivers who are hoping to take advantage of the Cash for Clunkers program. If you aren't careful, you could end up saving a lot less than you expect on a new gas-sipping vehicle.

Here's how it works. The new federal program allows folks who are driving around with gas-guzzlers to trade them in for a credit worth up to $4,500, provided they purchase a new and more fuel efficient car. (Click here for all the rules.)

Sounds great, right? Not so fast. After reading one of my favorite automotive websites, Edmunds.com, I know realize this program has a serious flaw. Rather than Uncle Sam sending drivers a check directly, the money has to pass through a car dealership. And if you aren't careful at least part of the credit could vanish during the negotiations for the new vehicle. (Okay, the cash wouldn't actually disappear. It would just go to the slick salesman and not you.)

Here's how Edmunds.com envisions the negotiations going wrong for the driver:

"Say you want to buy a car with a sticker price of $24,500. You drive your clunker to the car lot and tell the salesman you know your car qualifies for $4,500 credit because the old beater has a 17 mpg combined EPA rating and you want to buy a car with 10 mpg improvement.
The salesman nods in agreement and says you can now buy this fine car for a cool $20,000.
What's wrong with this scenario? The salesman deducted the $4,500 from the sticker price. He should have deducted the $4,500 from the lowest negotiated price.
So now let's say that you are a smooth operator and you block the salesman's gambit and begin negotiating. Well, now the problem is that the salesman knows what your hold card is: $4,500. He's going to keep his price higher knowing that you are psychologically softened up with a nice federally mandated cushion."
Fortunately, both scenarios aren't inevitable. Instead of mentioning your clunker trade-in, you should follow these steps:
  • First, decide what car you want and research what other people in your area are paying for it. In other words, don't pay the sticker price. Instead, look up its True Market Value on Edmunds.com. Or you could check out Consumer Reports' Bottom Line Price to see what dealerships are paying for the vehicle. (The report will cost you $14.)
  • Second, start negotiating on the price alone. Don't mention the Cash for Clunkers program. And whatever you do, don't fall into the trap of telling the salesman how much you're willing to spend each month on auto payments. If you do, he'll find a way to get you to the top of your budget, even if it means charging you a higher interest rate on your loan than you would otherwise qualify for. Remember, these guys are professionals and extremely skilled at separating you from your money.
  • Finally, only after you've agreed upon a price and have your financing lined up should you mention the Cash for Clunkers program.
One more thing, consider reading Edmunds.com's Confessions of a Car Salesman for the inside scoop on how car dealerships work. You will never approach buying a vehicle in the same way again.

More on MoneyWatch: Should You Dump Your Old Car
Junked and Crushed Cars image by Dave_7, CC 2.0.
  • Stacey Bradford

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