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Cash for Clunkers Part 3: Running the Numbers

Ylan Mui

Your verdict is in: We should take advantage of cash for clunkers and buy a new car.

Here are some excerpts from the responses I've gotten:

"Buy the new car! If you can afford to save for a new car and only finance a portion, you can afford to make the air somewhat cleaner for all of us and also to save gasoline. We all pay for the dirty air your vehicle is producing in terms of our health and health care costs."

"You’d be NUTS not to grab the money now."

"While I wish the government had provided me with the same incentive, my mechanic seems very glad they didn't."

For those of you who haven't been religiously reading our blog (for shame!), I wrote on Monday about new federal legislation that gives consumers up to a $4,500 credit for trading in a gas-guzzling car for a new, more fuel-efficient one -- aka the "cash for clunkers" bill. My husband has a 1995 Land Rover that is on its last leg (er, tire?), and we have been considering taking advantage of the credit to buy a new car.

As we got more serious about this purchase, we decided it was time to run the numbers to see if it makes financial sense -- and just how good of a deal it would be.

We are looking at several types of cars ranging in price from about $15,000 to $25,000. So let's say we end up spending $20,000 and, to be conservative, we qualify only for the $3,500 cash-for-clunkers credit.

That takes our purchase price down to $16,500. We plan to put about $5,000 down, so we would finance $11,500.

I used Bankrate to search interest rates on four-year auto loans in my area and found they ranged from 4.2 percent (with fees) to 9.2 percent. Again, being conservative, let's assume the worst case scenario of a 9.2 percent rate.

Using Bankrate's terrific auto loan calculator, I found that my payments would be $287.27 per month, and I would end up paying $2,289.02 in interest.

That's still less than the $3,500 federal credit. If we were to save money for a year and pay for the new car in cash, we would receive roughly $800 for our trade-in and save $2,289.02 in interest -- which adds up to $3,089. Again, less than the federal credit.

So this does make good financial sense for us, especially since we hope to pay off our loan early. If we were to put $500 per month toward our loan, we would only end up paying $1,200.37 in interest.

I've already received an e-mail from one dealer advertising the cash for clunkers program. But I don't plan on mentioning it when I walk into the showroom. I don't want them to know that they've got wiggle room worth as much as $4,500.

What do you think of the calculations? Am I missing anything? The next step will be to find the best financing offer possible. The cash for clunkers saga will continue!

By Ylan Mui  |  July 22, 2009; 7:01 AM ET
Categories:  Autos , Cheap & Green , Consumer News , Ylan Q. Mui  
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Comments

Do you drive your RR a lot?

At our house one of us commutes via Metro and the other via car. There really isn't a reason to replace an old clunker if it's just for driving around on a weekend.

Also, for $20K I assume you aren't replacing it with a car of a similar size. There are some pluses of owning a larger car - hauling stuff around, the occasional trip where you need more space.

Although it feels like you're leaving the clunker money on the table, I think I'd wait until I could pay cash. I'm with Michelle about the car-debt cycle.

Posted by: RedBird27 | July 22, 2009 10:55 AM | Report abuse

With less than $1,000 margin, I'll be curious to see if the math really decides this one for you, Ylan.

Once you get in that showroom, it's tough to walk away.

Posted by: gettingdizzy1 | July 22, 2009 11:07 AM | Report abuse

My thoughts are aligned with the first commenter. Have you considered if you could downsize to ONE car? Do you really need a second car? If that is possible, I would not go for the new one, not even to take advantage of the credit, and much less if I couldn't pay it in full. Also, if you live in the city there are so many other options, such as ZipCar, that are way cheaper and more convenient. DC neighborhoods can surely benefit from fewer cars cramming the ever shrinking street parking spots.

Posted by: GuiS | July 22, 2009 11:17 AM | Report abuse

Would you be shopping for a new car with the same "Gotta buy NOW!" if cash for clunkers were not available? If not I'd step back and run numbers and compare from the situation you'd been in if the offer weren't on the table.

Also, though you indicate a potential "worst case" of the 9.2% interest rate. If you really think that's a possibility, I'd be more focused on what could I do to change things so I could get the best, or much closer to the best possible interest rate.

Posted by: Ravyn | July 23, 2009 7:20 AM | Report abuse

You are forgetting that you will be able to deduct in your federal taxes the state/local taxes you pay on the purchase of your new car if you do it by 1 January 2010 (http://moneyunderyourfuton.wordpress.com/2009/07/13/cash-for-a-clunker-deduction-for-a-brand-new-car/). Yet another reason for getting the new car this year.

Posted by: mer37 | July 23, 2009 11:05 AM | Report abuse

The comments to this entry are closed.

 
 
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