In June 2009, Congress passed the Consumer Assistance to Save and Recycle Program (also known as the CARS Act) which provides financial incentives to consumers trading in less fuel efficient vehicles to purchase new cars with better gas mileage. However, the program prohibits dealers from reselling vehicles which cuts dealer margins and may reduce their ability to bargain resulting in higher prices for car buyers. At most, cash for clunker dealers will base trade-in value on scrap metal prices, which are just a few hundred dollars per vehicle—and that is on the high end.

Old Cars Most Likely to Benefit

The problem with the CARS Act is that the $3500 or $4500 credit offered by the government may not offset the loss in trade-in value. The consumers most likely to benefit from the cash for clunker program are those who have older cars (the program is limited to vehicles 25 years and younger) that are pretty well junked with a very low blue book value. So long as the credit amount is more than the blue book value and/or outpaces the costs of needed repairs, consumers should come out ahead.

Fuel Efficiency is Important

Vehicles must also meet fuel efficiency requirements. The primary goal of the CARS Act is to take inefficient cars off the road and replace them with new, fuel efficient models. Trade-in vehicles must have a combined fuel inefficiency of 18 miles-to-the-gallon or less in order to qualify for the cash for clunker credit. New vehicles must improve the mileage of the trade-in by 4 to 10 miles. The better the mileage improvement, the more money consumers will receive from the government.

Calculate Savings Before Buying

Consumers should calculate the fuel costs of their current vehicle against the potential savings of a new car to see if they offset the loss in trade-in value. Dealers may also offer additional financial incentives to lure in owners of cars that have a higher blue book value.

Cash for Clunkers Starts July 23rd

Consumers should be aware that the cash for clunker program does not start until July 23, 2009. Currently, no dealers are officially registered with the government as certified cash for clunker car dealers. Although some car manufacturers as well as individual car dealerships are operating under the assumption they will qualify as a cash for clunker dealer. Dealers feel they can't afford to wait for the program to go into effect as Automotive Industry experts predict the CARS program will run out of funding by Labor Day. However, the government warns that cars purchased before the cash for clunker program is implemented may end up not qualifying for the CARS credit.

Consumers should be cautious of purchasing new vehicles before the official cash for clunker start date. Prior to purchasing a new vehicle, verify that dealers are licensed as required by the CARS Act and that they are actively pursuing registration as a cash for clunker car dealer. Ask what happens if the dealer doesn't receive registration as planned--will car buyers be liable for repaying the credit advance?

Stay up-to-date on the cash for clunker program by following cash for clunker media reports . While cash for clunker programs have been successfully utilized in Europe, this is the first time they are being implemented in the United States and there are bound to be a few bumps in the road.