After depleting the initial $1 billion allocation in the “cash for clunkers” program in less than one week, Congress passed a new bill, adding $2 billion to the program late Thursday night. President Barack Obama quickly signed it into law Friday.
The additional allocation will allow about 500,000 more cars to be traded under the program, but low inventories may mean that consumers cannot buy the car they want before the new money runs out.
The program, officially called the Car Allowance Rebate System, or CARS, was designed to help consumers buy or lease a more environmentally friendly car, pickup or SUV when they trade in a less fuel-efficient one. Consumers participating in the program get a $3,500 or $4,500 credit toward the purchase of a new vehicle depending on the fuel economy improvement between the two vehicles.
This credit is considered the trade-in value and their clunker is sent off to be crushed. Buyers don’t get the traditional trade-in value for their old car or truck because it won’t be resold as a used car. The only dollars they can put toward the purchase of a new car is the government money and any additional incentives from the manufacturer.
Complete details of how the program works can be found at “Six steps to ‘cash for clunkers.'”
The CARS program was sent into a tailspin and was nearly suspended last week when a survey of dealers by the National Automobile Dealers Association, or NADA, indicated that enough cars had been traded in under the program to deplete the initial $1 billion allocation. The survey also revealed that consumers were purchasing or leasing vehicles eligible for the higher $4,500 credit by a two-to-one margin over the $3,500 credit.
The National Highway Traffic Safety Administration, or NHTSA, the agency administering the program, was caught off-guard by the analysis because problems with the Web site set up to process dealers’ requests for reimbursements meant that only a few thousand claims had been submitted, while dealers had a backlog of transactions that they were attempting to submit without success. As of Aug. 5, the NHTSA says 184,304 claims had been processed, totaling $775.2 million, and claims were still coming in.
The White House assured consumers and dealers that the sales made under the program would be honored all this week regardless of the Senate vote, but many dealers were reluctant to make deals under the program after all of the problems of submitting the claims online and the uncertainty of whether the program would continue.
Earnhardt Ford/Mazda in Chandler, Ariz., continued to make clunker deals this week but had consumers sign an addendum, stating that “if the program did not continue, they would either return our vehicle or we would renegotiate the deal,” says John Nissen, general manager of the dealership.
However, Secretary of Transportation Ray LaHood assured dealers that the Web site problems had been fixed. “We believe processing will go much smoother,” he said at a press conference earlier this week. Under the programs rules, dealers are supposed to be reimbursed within 10 days of filing the paperwork, but the NADA is reporting only 1,600 reimbursements have been made so far.
Earl Stewart, general manager of Earl Stewart Toyota/Scion of North Palm Beach, Fla., says his staff had successfully submitted the paperwork for all of the 100 deals they made, but all applications were still listed as “under review” by the NHTSA. “We have about $400,000 in cash tied up,” he says.
After the NADA reported its survey results, the House quickly passed a vote Friday, July 31, allocating an additional $2 billion to the program from another stimulus program that focuses on green energy before it recessed for the rest of the month. If the Senate had not passed the bill as it stood, the program would have been suspended until the House could consider amendments when it returned in September.
The additional $2 billion means that approximately 500,000 additional “clunkers” can be traded in for new vehicles under the program. “Extending the program benefits the environment and the economy. It’s the best kind of stimulus,” says John McEleney, NADA chairman and a multifranchise dealer in Iowa.
While the Toyota Corolla was the vehicle most commonly purchased under the program, General Motors was the manufacturer with the highest percentage of vehicles purchased at 18.7 percent, according to the NHTSA data. General Motors, Ford and Chrysler vehicles represented about 45 percent of the new vehicle sales under “cash for clunkers,” which is about the same as their share in new vehicle sales overall.
The NHTSA data also shows that 83 percent of the trade-ins were trucks while 59 percent of the new vehicles purchased thus far were cars, representing 9.6 miles per gallon, or a 61 percent improvement in fuel economy. “All buyers, regardless of trade-in, are opting for smaller, more fuel-efficient cars at a higher than usual rate,” says Michelle Krebs, senior editor with Edmunds.com’s AutoObserver.com.
This trend is unlikely to continue at the same rate, according to Paul Taylor, the NADA’s chief economist. “Supply of these small cars is dwindling as they get purchased with the demand CARS has created, so new participants in the program are likely to end up purchasing vehicles that are slightly larger and somewhat less fuel efficient as a result,” he says.
Indeed, preliminary inventory reports by the Automotive News Data Center indicate that the number of unsold new vehicles across the country had fallen below 2 million units –the lowest figure since at least 1992 when the group started tracking this number.
Because it takes automakers at least a month to replenish dealer inventory when it drops unexpectedly, new-car buyers shopping this month will have less of a selection on dealer lots. Still, NHTSA is projecting that the new funds will be depleted by Labor Day, so waiting to make a purchase may not be an option. The result is that consumers who want the CARS credit may end up making a deal but waiting for the car of their choice to arrive in a future shipment or settling on another model.
In addition to its environmental benefits of replacing old gas guzzlers with new, more fuel-efficient vehicles, the CARS program also seems to be helping consumers directly in their wallets. By driving more fuel-efficient vehicles, consumers will save money on gas at every fill up. In addition, an Edmunds.com analysis indicates that the value of the trade-ins is $1,475 on average, allowing consumers to more than double or even triple their trade-in depending on whether they qualified for the $3,500 or $4,500 CARS credit.
Many dealers also are reporting that consumers who have older vehicles that do not qualify as a clunker under the program are buying cars anyway. A Kelley Blue Book Market Intelligence Study on the CARS program found that 10 percent of new vehicle shoppers are likely to purchase a car sooner because of the program. Earnhardt Ford/Mazda has sold 55 vehicles under the program, as well as making 10 additional sales to consumers whose vehicles did not qualify but chose to make a purchase anyway.
How much the program has actually resulted in boosting new car sales remains to be seen. Summer is traditionally a time when automakers work hard to sell cars by making deals to get rid of their inventory to make room for the new model year, which arrives in early fall. Edmunds.com Chief Executive Jeremy Anwyl says, “This program would have made more sense to continue in October when the traditional summer selling season is over.”
The CARS program will end Nov. 1, 2009 or when the allocation runs out, whichever comes first. Updates on the program as well as more details can be found at Cars.gov or by calling (866)227-7891.