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Trevor Traina Headshot

Used Car Buying in Our Cash-For-Clunkers World

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Times have been tough in the last year for the US car market, especially the used car market. Because people haven't been buying nearly as many new cars as they have in years past, there are fewer trade-ins. Without these, the certified pre-owned (CPO) programs that tend to buoy the used car market are suffering from a lack of quality used cars.

Then came the government's second bail-out for the Automotive Industry, the CARS program, better known as Cash for Clunkers. According to a survey of 517 in-market shoppers done by Kelley Blue Book (KBB), the Cash for Clunkers program has persuaded 1 in 10 shoppers to purchase a new vehicle sooner. The program, fortunately for the used car market, mandates that the engines of all Cash for Clunker trade-ins be destroyed so that the clunkers only have value in the salvage market. The used car market dodged a bullet with that one because if those cars flooded into dealer lots, supply would be rising as demand (for used cars) fell; a dangerous combination.

The program's early success has meant 250,000 vehicles have currently been removed from the used car market, and thanks to the approved allocation of an additional $2 billion toward the program, KBB anticipates another 500,000 vehicles to be traded in later this year, accounting for a 4.7 percent total reduction in used car supply. Great news for the used car market, right? Lower supply and steady demand means prices will go up as the program continues. However, KBB believes the bubble will burst once the government program comes to a close. KBB analyst, Alec Gutierrez, remarks, "Dealerships have reported increased foot traffic, creating a false sense of automotive market recovery. As a result, dealers are going to auction to restock inventory, driving up used-car values...Ultimately, there will be a possibility of a severe contraction in auto sales as soon as the Cash for Clunkers program runs out of funding."

Naturally, the car dealers seem to have predicted this and have sprung into action with what they're calling "The 2009 Automotive Stimulus Program." This program, totally unaffiliated with the government despite sounding like a congressman named it, offers an additional $4,500 in incentives to consumers who quality for the Cash for Clunkers program as well as those who do not. The trade-in requirements for this dealer program differ from those of the government's as such:

•The trade-in must be a 2006 or earlier model. Cash for Clunkers mandates that the trade-in be less than 25 years old.

•The replacement vehicle only needs to be 2 MPG more efficient than the trade-in. Cash for Clunkers requires a gain of 4-9 MPG to get the $3,500 credit and 10+ MPG to get the $4,500 credit. Note: there are a few exceptions to this rule for larger and heavier trucks.

•No minimum fuel efficiency standard for the dealer program. The government program requires the trade-in to get less than 18 MPG (combined city/highway). Again, there are a couple of exceptions here.

•The replacement vehicle in the dealer program does not have to be new! Cash for Clunkers only applies to new replacement vehicles.

It appears as though the dealer program is basically a counter-measure to the government program that is aimed at keeping a bubble from forming and then subsequently bursting in the used car market. Note that the requirement for a nominal 2 MPG improvement is more a nod to moving inventory and keeping the market balanced than it is to taking gas guzzlers off the road. A lot of analysts and industry people seem to agree that this spike in new car sales is a result of an un-sustainable government program and that the market will swing back to the favor of the buyer upon the program's end. If you're in the market for a used car, it may be best to wait it out or find a deal where your trade-in can net you a great rebate from the dealer program without forcing you to pay above what the used car was going for six months ago.

Finally, as if you didn't have enough factors to weigh in your decision on whether and when to buy new or used, here are some other tidbits. Did you know that some manufacturers, like Chrysler, are actually doubling the $4,500 rebate for select models? I didn't either until a friend of mine had his own Cash for Clunkers experience. Also, with all of these clunkers exiting the market, like other events that have anomalous, unnatural effects on the used car market (think Hurricane Katrina and the bevy of flood/salvage vehicles that were being fraudulently sold) this event has the potential to have similar consequences. Always, always get a vehicle history report on any car you're thinking of buying before doing so. Many times, the dealer will already have the report printed out but it may not be a current report (check the date the report was run). The safest bet is to spend the $15-$25 and run one on your own.