Dealers say ‘clunker’ rebates drawing in buyers

Image: first family to purchase a new car with Cash For Clunkers
Christopher Choquangsam and his family bought a new car through the ‘cash for clunkers’ program, which offers up to $4,500 in government incentives for those who trade in an old gas guzzler, at Paragon Honda in Woodside, N.Y.PR NEWSWIRE

On Friday, a visitor to McEleney Autocenter in Clinton, Iowa, turned in his old, rusty Ford truck and drove away with a brand new Hyundai Accent.

Between the rebate he received through the federal government’s new cash-for-clunkers program and a sales incentive from Hyundai, the truck owner bought a car worth $14,000 for just $8,000. He also got a 100,000 mile warranty, said John McEleney, who runs a pair of automobile dealerships in the Clinton area, selling General Motors, Toyota and Hyundai vehicles.

“The truck he brought in only had about $100 worth of scrap value,” McEleney said. “Now his new Hyundai has much better fuel economy than the old truck, and he won’t have to spend money on tires and brakes for a while because he has a brand new vehicle.”

Auto dealers around the country are reporting that the first weekend of the government's $1 billion “cash for clunkers” program, officially titled the Cash Allowance Rebate System, or “CARS,” is already boosting vehicle sales, despite some small hiccups in its implementation and concerns that the rise in sales will be short-lived.

The program, which is due to expire on Oct. 31, lets new car buyers turn in an old vehicle and receive a voucher for between $3,500 and $4,500 to put toward a new, more fuel-efficient car. Cars and trucks must be 1984 models or newer and get 18 mpg or less to be eligible for a trade-in rebate.

The idea is to spur vehicle sales while the industry is struggling with the effects of the economic downturn. U.S. auto sales are selling at a pace of about 10 million units per year, down sharply from a few years ago when they sold at the historic level of 15 million vehicles annually — the benchmark for more than a decade.

The program is also designed to help the environment by getting old, gas guzzling vehicles off U.S. roads. Old cars traded in at dealers will be scrapped at a government-approved facility.

The National Highway Traffic Safety Administration (NHTSA) said that so far the nation’s 20,000 or so dealers have made 20,564 applications to participate in the program (a dealer may sell more than one car brand, but must make a separate application for each brand). NHTSA spokeswoman Patricia Swift-Oladeinde said the agency is in the process of selecting qualified dealers and has already rejected 2,964 applications.

U.S. Transportation Secretary Ray LaHood said Monday he expects the program to spur sales of 250,000 new cars in the United States over the next few months.

“This will be a huge boost to car manufacturers across the country,” he told CNBC Monday. “This is a very good time to be buying cars in America; the very best.”

Carroll Smith, owner of Monument Chevrolet in Houston, Texas, said the cash-for-clunkers program has surpassed his initial expectations. Foot traffic at his dealership doubled on Saturday, he said.

To qualify for the program, car buyers must bring in a vehicle with an economic value of less than $4,500, he said. They must also have proof that the vehicle was insured continually for at least a year, and they must buy a new car that has a higher fuel economy. The customer must also qualify for financing, he said.

“I thought the program’s narrow focus would mean limited participation, but I’ve seen people come in that qualify,” Smith said. “When you throw in a rebate, it creates more interest in people that wouldn’t have thought about buying a new car, so it has brought people into the showroom.”

The program hasn’t been without its glitches, he added. NHTSA didn’t release final rules and procedures for participation in the program until Friday, and some dealers have found the government’s 136-page instruction manual for the program long and confusing. Most dealers are treading into the water softly, he said.

“We had a lot of foot traffic in our store and inquiries about the program, but there has been some confusion about it, so we’re off to a rocky start,” said Smith. “We had a lot of people out there ready to buy before the rules came out, and I’m guessing buying interest at our store is up 25 percent from what it would be normally. If we end up with a 10 percent increase in sales it’ll be a good thing for us.”

The potential for a deal is drawing car shoppers into showrooms, said John McEleney, who is also chairman of the National Automobile Dealers Association.

Manufacturers are not able to diminish their incentives with the clunkers program, and so in cases where manufacturers' incentives already exist, car buyers are getting both rebates to put toward the cost of a new car. Some GM vehicles are available with up to 72 months of zero-percent financing, he added, while Chrysler has said it plans to match the clunkers incentive, offering $4,500 in cash toward the purchase of a new vehicle.

The clunkers program is also making financing for car purchases available to more Americans, McEleney said.

“A lot of people on lower incomes with credit issues have had trouble getting financing in recent months, but the beauty of this program is that people are taking advantage of a large incentive, and they’re only asking the lender to give them something like $8,000 toward a car that sells for $14,000, so the risk of default or repossession is very small,” he said.

Although the program runs until Oct. 31, McEleney expects the $1 billion in government money set aside for the program to run out before then, perhaps by as early as September.

“People are motivated because they know this program will not run indefinitely, we’re finding that even if they don’t qualify for the program, they’re buying cars anyway because the manufacturers’ incentives are so sizeable,” he said.

“A lot of people have old cars in the family, whether it’s used by a student or one they use to go fishing or hunting,” McEleney continued. “So it’s not just low-income people we’re seeing take advantage of this. It’s crossing all demographics.”

Not every dealer is upbeat about the program. Billy Dingman, who runs a Volvo dealership in Florida reckons “cash for clunkers” is a waste of taxpayer money.

“I don’t want my daughter paying for it and we’re already starting to see the economy come around,” he told CNBC Monday. “Don’t get me wrong, as a capitalist I am perfectly prepared to take your money, but I hate to see people out there buying cars just to be buying cars.”