Monday, July 27, 2009

Your Clunker’s Salvage Value Should Reduce the New Car Price

The CARS government program which pays you up $4,500 for your old gas-guzzler, clunker is up and running. In fact, it’s exceeding my expectations for effectiveness. My first thought when I heard about this program was that most owners of older, cheap cars would not have the credit to buy new one, even with a $3,500 or $4,500 gift from Uncle Sam. I was wrong. A lot of people with good credit are trading in these old cars and this will result in a real short term boost for car sales nationwide. It’s entirely possible that the program could run out of money before the November 1 deadline. The funding for the program is $1 billion. This sounds like a lot, but will fund only about 250,000 new car sales which is an average week’s sales.

For all of the information on the program, you can click on http://www.cars.gov/. Unfortunately, as is the case with most government programs there is “too much” information. The rules comprise 136 pages and are quite confusing and ambiguous.

The purpose of this column is to point out one of the least understood but most important elements of the program. That is what is the true “salvage value” of your clunker trade-in. You are at the mercy of the dealer to learn about this unless you want to shop your clunker to the list of government approved salvage companies. The dealer is permitted to keep $50 of the salvage value of the trade and the rest is to be given to the consumer. With a typical salvage value of $200, the dealer retains $50 and $150 is added to the $3,500 or $4,500 you qualify for.

However that small amount assumes that the car will be crushed and sold only for scrap metal value. A lot of clunkers have valuable parts and accessories that can be disassembled and sold individually. These can total thousands of dollars...a CD player, tires, camper top, air-conditioning compressor or condenser, an alternator, etc. The only way to truly maximize the true value of your clunker is to competitively shop it with several approved salvage dealers. The dealer you buy your new car from should do this for you. In my dealership, we get bids from 5 different government approved salvage dealers and, of course, take the highest bid.

The dealer you are buying from is required by law to disclose the amount of money he is receiving from the salvage dealer. You should sign a form with this information on it and receive a copy signed by the dealer. This is your money and should be taken off the price of the new car you are buying.

This salvage value could make a big difference in the final price you pay for your new car. When you are shopping for your new car, you need to compare not only the price of the new car, but the salvage amount each dealer is allowing you. If he discloses that he is allowing you only $150, that means that you are receiving only the scrap metal value of your car. If you tires are in good shape, these alone should be worth more than $150. You should ask the dealer to identify the salvage company he is selling your clunker to. You should also ask to see what the other bids were from other salvage dealers. If a dealer is getting only one bid from one salvage dealer I would be very suspicious.

One of the reasons that it took the government so long to get all of the rules of the CARS program out was the realization that there is a huge opportunity for fraud in the sale of the clunker. In my opinion, this opportunity still exists. What’s to prevent a car dealer from disclosing a lower amount than the scrap dealer actually pays him? The scrap dealer can pay the dealer one amount by check and the other in cash “under the table”. Using multiple scrap dealers with multiple bids would go a long way to reduce this threat, but, unfortunately, this is not a requirement of the CARS program.

7 comments:

  1. Earl - your postings are always very enlightening and informative to us in our office. I talk to many secondary-market auto dealers nationwide that don't fully understand the ins & outs of their business. Is it ok if I point them to your blog?

    kelly@waynereaves.com

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  2. Dear Kelly C,

    Thanks for your comments and I would be happy for you to point out my blog to your secondary-market auto dealers.

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  3. Hi Earl, our Dealer only gave the salvage value of $50. They say that's the standard they are giving everyone who comes in. They did not disclose the salvage value whatsoever. I wasn't aware of the salvage value trade-in aspect, not that it would have mattered much, anyway.

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  4. Hi, Anita.

    Your dealer misinformed you when he said $50 for salvage is the "standard". He further deceived you if he did not give you a written "estimate" of the salvage value of your vehicle.

    In my dealership, the lowest price we have been paid by salvage dealers for about 60 clunkers is $250. We have received as much as $800. A good set of used wheels can be worth several hundred dollars and a set of decent tires should be worth at least $100.

    In the CARS program the government intended for the clunker owner to be made "aware" of the true salvage value of her trade-in so that she could take it into condideration in negotiating the best price for the new car.

    Unfortunately, your dealer did not comply.

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  5. Earl - Thanks for the great post. It was by far the most informative that we have been able to find. We are struggling, as consumers, to get accurate information. Our dealer stated he hasn't picked a scrap yard so he can't give us the name so we can call ourselves. He is saying it will only be $50, so we get nothing...what recourse do we have? Thanks for your help! Andrea

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  6. You're welcome, Andrea.

    On about 100 clunkers, we've received no bids below $275.

    If your dealer is getting only $50 for your clunker, he is either being taken advanatage of by the salvage dealer or he's taking advantage of you. The platinum in your car's catylytic coverter, alone, is worth more than $50.

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