Did the Government’s Cash for Clunkers Event Cause the Used Car Price Spike?

Do you remember the Cash for Clunkers event? It was a government program that allowed people to turn in a used car, truck, or SUV for a new car. The vehicles had to meet a few requirements to be eligible for trade-in. However, this took a lot of used cars off the streets. Is the Cash for Clunkers program responsible for the current used vehicle price spike?

What was Cash for Clunkers or Car Allowance Rebate System (CARS)?

How did Cash for Clunkers impact used car prices?
How did Cash for Clunkers impact used car prices? | Justin Sullivan/Getty Images

Cash for Clunkers, also known as Car Allowance Rebate System (CARS), was a program meant to help people get into a new vehicle. These were people who might not have been able to afford one otherwise. The program ran from September 2009 through March 2010 and saw successful sales during that time. According to Investopedia, the value for the vehicles was between $3,500 and $4,500 toward a new car.

The automobile had to be 25 years old and had to get less than 18 miles per gallon. Larger trucks and vans had different requirements. The vehicles also had to be in driveable condition. The money received for the “clunker” had to be put toward a five-year minimum lease on a new vehicle.

It was sold as a way to get less environmentally-friendly vehicles off the road and get people into newer vehicles. However, it seems to have further-reaching impacts than initially anticipated.

How many used cars did Cash for Clunkers destroy?

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The clunkers would also be eligible for a scrap value. Upon trade-in, the new car had to be under $45,000. It also had to get at least 22 mpg combined. The Car Allowance Rebate System was initially granted $1 billion. It was so popular that Congress ended up allocating an additional $2 billion. That brought the total to $3 billion for Cash for Clunkers.

The final numbers indicate that 680,000 vehicles were traded-in. All of these vehicles were required to be destroyed at the dealership. The National Bureau of Economic Research said the program’s positive effects were “modest, short-lived, and that most of the transactions it spurred would have happened anyway,” Investopedia reported.

In a study, Edmunds suggested that Cash for Clunkers might be the reason used cars are so high right now. With fewer vehicles on the road to buy, the used car supply is very low. It would be hard to place the blame solely on Cash for Clunkers, but it certainly impacted used car prices. No one could have predicted a global pandemic making new vehicles harder to come by. But with CARS and the global pandemic causing a shortage of new automobiles, the situation was unavoidable.

The program did help stimulate the economy and took some fuel-inefficient vehicles off the road. But it seems the cons outweighed the pros with the used car shortage.

How did the CARS program affect vehicle costs?

In 2010, Edmunds gave a few reasons for suggesting that Cash for Clunkers drove used car prices up. Edmunds.com Analyst Joe Spina said that used automobiles were in short supply for three main reasons, one of which was Cash for Clunkers. The first reason was fewer vehicles coming off-lease.

“‘Cash for Clunkers’ rendered many thousands of used vehicles inoperable and removed them from the scene at an unnaturally high rate. Third, because of the economy people are holding onto their cars longer.”

Edmunds

Even though this report is 11 years old, the idea still applies. Cash for Clunkers took 680,000 vehicles off the road that might otherwise still be running. On the flip side, it also had nearly 700,000 vehicles sales. In general, people were not pleased with the CARS program. At the very least, dealerships could have recycled many of the used cars. Instead, driveable used vehicles were crushed and destroyed.

People generally benefitted from the program, but it took many affordable vehicles off the road that might still be rolling around to this day. There have been rumors of a similar program happening in order to get drivers into a new electric vehicle, but that has not been confirmed yet.

RELATED: Consumer Reports: Most Reliable Used SUVs Proven to Get Over 200,000 Miles