4 Things to Know About the Cash-Strapped 'Cash for Clunkers'

The government set aside $1 billion for the "cash for clunkers" program, which is meant to give $3,500 or $4,500 vouchers to people who trade in their gas-guzzling vehicles for new, fuel-efficient ones. But now that that the White House says the program doesn't have enough money to get through the weekend, many consumers are confused about what to do next. Here are four things that consumers can do in this rapidly-changing environment:

1. The vouchers will be honored.

Whether or not the cash for clunkers program gets new funds depends on the Senate, which is expected to soon vote on a $2 billion infusion (the House has already passed a similar bill). But the Senate goes into recess on August 10, leaving less than a week to pass a bill. Understandably, some shoppers are concerned that they might be caught with signed paperwork on a new car but no $3,500 or $4,500 voucher.

Running out of money is a real concern because the cash extension might have a rough time in the Senate. Some supporters of the original Consumer Assistance to Recycle and Save program, like Missouri Democrat Claire McCaskill, don't support adding new money. But being stuck with a new car and no voucher is highly unlikely. Transportation Secretary Ray LaHood has said that all car purchases eligible for the CARS program through this Friday will be honored, even if the program runs out of money.

[See Cars Hurt Most by the Recession.]

2. Don't forget the used market.

With a stream of headlines about cash for clunkers running out of money, you might think that your top priority is running out and getting a new car while the money lasts. But time could be running out on deals for used cars as well. Cash for clunkers may have had the impact—unanticipated by many—of actually boosting used-car sales, and thereby, prices. One would think that the vouchers would shift consumer attention away from used cars to new one. "I anticipated a negative impact" on used-car prices, says Tom Webb, an economist at Manheim Consulting. But prices for used cars have gone up every month in 2009, and while the last week of July—the first week of the clunkers program—was weaker than the rest of the month, Webb says the acceleration continued. "The overall pricing environment is still strong," he says.

According to Webb, it's certain that many people who would have otherwise bought used cars have been enticed to buy new ones instead. But that may have been offset by another phenomenon: People are attracted to dealerships by the clunkers program but then find that they can get a better deal with a used car.

Those deals, however, might become less frequent. Every clunker traded in for a voucher must be scrapped entirely, according to the requirements of the program. Each car that is scrapped means one fewer car that might otherwise be sold on the used market. Webb adds that the popularity of the program so far indicates that many dealers will be clearing out their inventory of new cars, which means demand for used cars will go up. Shrinking supply and growing demand mean it's a safe bet that used cars will become less affordable in the coming months.

[See Cars Getting a Boost From the Recession.]

3. Consider cheaper ways to improve fuel economy first.

Supporters of extending the program and infusing it with new money say it's saving consumers a bundle. When Congress debated the $2 billion extension to the program, Rep. Bart Stupak, a Michigan Democrat, said that the program has led to a consumer benefit of "a 69 percent improvement in fuel efficiency from their trade-in vehicles, with average annual gasoline savings of $750."

But if you want to save money on gasoline, there's often a much cheaper way to do it than buying a more fuel-efficient car. Changing your fuel filter, getting a tire gauge, and getting your car's emissions system checked can make a big difference. "The price of a one-month payment could improve your fuel economy as much as buying a new car," says Aaron Lowe, a vice president at the Automotive Aftermarket Industry Association.