What about the “Cash for Clunkers” program?

President Obama has introduced “Cash for Clunkers,” a subsidy program designed to help the automotive industry, the environment, and drivers with older, less fuel-efficient cars.

Formally named the Customer Assistance to Recycle and Save (CARS) program, “Cash for Clunkers” is designed to stimulate the purchase or lease of brand new cars.

How it works

Turn in your gas-guzzler, a car or truck from 1984 or newer that gets less than 18 miles to the gallon, to a participating car dealer.

The dealer credits you with a down payment of $3,500 on a car with gas mileage 4 mpg better than your old car, or $4,500 for a car that gets 10 mpg more. The money is not taxed as income.

In the case of trucks, drivers need only trade up for a new vehicle that gets at least 18 mpg, with a 2 mpg improvement, to receive $3,500. Drivers receive the full $4,500 if they purchase a new vehicle with fuel efficiency 5 mpg greater than their trade-in.

The program remains in effect until November 1, 2009, or when the $1 billion allocated for the program runs out. It only applies to cars that have been registered and insured continuously with one owner for the past year. Additionally, the car must be in running condition. Gas mileage is determined according to the new combined city/highway mileage guidelines.

Criticism of CARS

The program has received criticism from financial experts and environmentalists alike. Environmentalists argue that older cars are being destroyed in exchange for brand-new models. They recommend purchasing used cars manufactured within the past three years, which still provide high standards for fuel efficiency, without adding to waste.

Also, with such generous guidelines for fuel-efficiency improvements, especially in the case of SUVs and light trucks, environmentalists say the program encourages the purchase of newer – but still relatively gas-hungry – trucks and SUVs.

Financial experts warn that taking advantage of the $3,500 to $4,500 credit may not be the wisest financial decision. Edmund’s car-buying guide lists the average price of a new car at $28,900. The average price of a used car lists at $13,900.

For drivers who wouldn’t normally consider buying a new car, they might be better off foregoing the incentives, accepting the dealer’s trade-in value, and putting it toward the purchase of a used car.

Prospects for Auto Manufacturers

Although the major U.S. and foreign car manufacturers are marketing the program and announcing sales to generate interest, doubt remains as to whether this will help an industry in dire straits.

With credit requirements more stringent and average people struggling to pay their bills, many people driving “clunkers” simply can’t afford a better car. Very rarely do people step up from a “clunker” to a brand-new vehicle. As financial experts have stated, paying an extra $14,000 to get $4,500 simply doesn’t make sense.

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In the short-term, news of the bill may have hurt car sales, as people intending to buy or lease a newer vehicle hold off to receive the government stimulus money.

Whether CARS helps the auto manufacturers or not will be determined in the near future. Investors considering investing in the car manufacturers might consider protecting the investment with stock options. A put option operates similar to auto or home insurance, if the price of the stock drops significantly, then the position is protected by the put option. Investors might also consider combining an income method with the protective put option method, that way income is generated every month, but also protected from market drops. A covered call investing strategy is an example of an income method, basically a call option is sold against a purchased or existing stock with the investor keeping the initial premium, kind of like leasing a house with an option to purchase.

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[tags] President Obama, Cash for Clunkers, Customer Assistance to Recycle and Save, CARS, Edmund, car manufacturers [/tags]