Consumer Car Buying Advice Blog

The cash for clunkers bill will have very few advantages for those customers in need of a bad credit car loan.

Consumer Assistance to Recycle and Save Act of 2009

From what we can determine here at Auto Credit Express, it seems that the government has finally settled on an official name for the cash for clunkers program that was recently passed by both houses of Congress. Originally known as Title XIII Consumer Assistance to Recycle and Save Act of 2009 of the Supplemental Appropriations Act, 2009, a trip to the official government site at www.cars.gov shows that the CARS acronym has now been assigned the words “Car Allowance Rebate System” – as if we need any more confusion.

In any case, it is now time to take a good look at the program to see how it might specifically help those buyers that are going to need a bad credit car loan to purchase their next car.

Bad credit car loans

We are going to be looking at buyers needing bad credit car loans for two specific reasons: Number one, Auto Credit Express is in the business of helping car buyers with tarnished credit reestablish their car credit by matching them up with dealers that specialize in dealing with a broad spectrum of lenders that issue subprime auto loans. Number two, in two separate studies conducted by Experian Automotive and based on consumer credit data as well as data supplied by state DMV’s, it found that although the percentage of all loans originating in the Prime market increased from 2006 to 2008, the overall number of Prime open auto loans decreased “leading to the conclusion that while more loans are being originated in Prime, they aren’t remaining Prime.” (1)

In other words, as the economy weakened starting in the second half of 2007, the number of prime buyers has decreased, while the number of subprime buyers has increased. It naturally follows, then, that in order for the economy and the auto industry to rebound, these non-prime buyers need to be encouraged to get back into the marketplace.

The program

So how will the CARS act encourage these buyers? Not to put too fine a point on it, but for the most part, it won’t help these people at all. Here is why: in order to be eligible for the program, a trade-in has to meet the following criteria:

•    have been manufactured less than 25 years before the date you trade it in
•    have a “new” combined city/highway fuel economy of 18 miles per gallon or less
•    be in drivable condition
•    be continuously insured and registered to the same owner for the full year preceding the trade-in

If your trade-in meets all of these guidelines, you’ll qualify for a $3,500 voucher if the combined fuel economy of the new car is between 4 mpg and 9 mpg better than the trade-in or a $4,500 voucher if the new car gets a combined mpg that is 10 or better than your trade-in.

This means that, in order for this to work to your advantage, your current car has to be worth less than $4,500 and have a combined fuel economy of less than 18 mpg.

Rhetorically speaking, how many vehicles are going to fall into this range?

Bad credit car customers

An even more important question for bad credit car loan customers is how many of them are in the market for a new car? Even if they are driving a car that meets these requirements, what kind of new car are they going to qualify for? With the high cost of credit, even a $4,500 down payment (along with manufacturer incentives) will keep the list of affordable vehicles rather short.

Another thing to consider is that although the additional cash will put bad credit car buyers in a better equity position in their new car, subprime lenders will still apply the same lending criteria. This means that buyers will still have to come to the table with a cash down payment and one that is fairly close to, if not the same as, current requirements.

Industry

Finally, as far as stimulating the domestic auto industry, well, that is also open to debate. Since the voucher replaces, rather than augments, the value of the trade-in, any customer who is currently driving a car that is worth more than $4,500 has absolutely no incentive to take advantage of the CARS program. At the same time, the majority of affordable new vehicles that subprime car buyers could choose from are, for the most part, imports.

The Bottom Line

If car buyers hoping to get a bad credit car loan were looking to the “cash for clunkers” bill to help them out, the answer is a big “maybe.” The odds of qualifying for this kind of loan and qualifying for the program are slim, indeed.

(1) Riding out the Storm, Experian Automotive, October, 2008

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