'Cash for clunkers' starts Monday

Feds release final rules for the $1 billion gas-guzzler trade-in program, including its recipe for killing engines permanently.

By MSN Money staff

Though automakers and their dealers have been peddling cash-for-clunkers deals since the bill was signed last month, the hard sell really begins Monday.

The program offers owners of many older vehicles up to $4,500 to trade them for brand-new vehicles.

Regulators on Friday issued the final rules for the $1 billion program, unveiling a framework for registering dealers and a way to pay them once a car is proved to be scrapped. Though dealers may not file for payment until today, any sale since July 1 that otherwise meets the requirements (spelled out below) is covered.

Some noteworthy provisions in the rules:

Only new-car dealers can issue the credit, and they must have an active franchise agreement with the manufacturer. That means used-car dealers can’t issue the vouchers. Neither can a new-car dealer that has lost its franchise, as several thousand Chrysler and General Motors dealers have recently.

Dealers are required to disclose to the consumer the scrap value of their trade-in and can keep $50 of that amount to cover their administrative costs.

Though all trades must be in drivable condition, dealers are required to disable the vehicles' engines before scrapping them. Regulators’ accepted procedure: Drain the oil, then run several quarts of sodium silicate through the engine. As engine heat evaporates the solution, deposits of dehydrated sodium silicate line the engine's lubrication system, abrading all the moving parts and causing the engine to seize.

The dealer must stamp the title "Junk Automobile, Cars.gov" before submitting it for reimbursement. And the dealer must have clear title before doing so.

Scrap facilities can sell any part of the car except the engine block or whole drivetrain, but ultimately the car must be taken off the road.

Violators of the rules face civil penalties of up to $15,000 per incident.

Beware 'cash for clunkers' sites
The National Highway Traffic Safety Administration is warning car shoppers that official-looking sites have already sprung up, offering information on the program and asking for personal data or preregistration.

In fact, if the site uses the term "cash for clunkers," it's not official at all. The program's name is the Car Allowance Rebate System.

"There's only one official site for the government, and that's NHTSA's CARS.gov Web site," said NHTSA spokesman Eric Bolton. "Folks should go there and not rely on 'cash for clunkers' sites on the Internet as they are not official."

An estimated 250,000 vouchers will be issued on a first-come, first-served basis. Dealers let you know whether your trade qualifies, credit the amount to your down payment, then apply for the voucher. Only new vehicles -- domestic or imported, purchased or leased -- qualify, and they must have sticker prices under $45,000.

Buyers do not have to register or apply for any part of the program. Dealers do.

Trade-ins must be 1984 models or newer, get no better than 18 miles per gallon, and have been registered and insured for the past year.

There's a catch
The vouchers aren't a panacea for buyers.

Car buyers must remember that their trades will be scrapped and have no value to the dealership above the amount of the voucher. A 10-year-old Lexus might qualify for the biggest ($4,500) voucher, but it's almost certainly worth more than that on the open market.

So, Rule No. 1 for buyers intent on using the program: Check and double-check the value of the vehicle you want to ditch. Almost any roadworthy vehicle is worth $1,000 and typically twice that if it's an import.

Which leads to Rule No. 2: The mileage you get in your daily driving does not matter one bit. What matters is what's on record with the government; its source of data is www.fueleconomy.gov. A muffler-dragging 25-year-old Toyota may meet the popular definition of clunker, but if the government's estimates show it got more than 18 mpg combined new, it's not a clunker. You'll see two sets of fuel-economy numbers for most cars: one calculated under an older EPA system, the other recalculated to reflect a new formula. Use the new one.

Rule No. 3: You can layer government programs: Trade an old pickup for a shiny Ford Fusion Hybrid, for example, and you can get $4,500 because the trade is going to the crusher and a $1,700 tax credit (a dollar-for-dollar cut in your taxes, way better than a deduction) for the new hybrid.

Not all hybrids qualify for deductions; Toyota and Honda have sold their quotas under the law, and Ford's expire in the fall. Check out current qualifying vehicles here. Some new "clean diesels" qualify for these credits as well; here's a list.

On top of that, the sales tax on any new car, with a price of up to $49,500, bought between Feb. 17, 2009, and the end of the year is deductible on next year's tax return.

Which leads to Rule No. 2: The mileage you get in your daily driving does not matter one bit. What matters is what's on record with the government; its source of data is www.fueleconomy.gov. A muffler-dragging 25-year-old Toyota may meet the popular definition of clunker, but if the government's estimates show it got more than 18 mpg combined new, it's not a clunker. You'll see two sets of fuel-economy numbers for most cars: one calculated under an older EPA system, the other recalculated to reflect a new formula. Use the new one.

Rule No. 3: You can layer government programs: Trade an old pickup for a shiny Ford Fusion Hybrid, for example, and you can get $4,500 because the trade is going to the crusher and a $1,700 tax credit (a dollar-for-dollar cut in your taxes, way better than a deduction) for the new hybrid.

Not all hybrids qualify for deductions; Toyota and Honda have sold their quotas under the law, and Ford's expire in the fall. Check out current qualifying vehicles here. Some new "clean diesels" qualify for these credits as well; here's a list.

On top of that, the sales tax on any new car, with a price of up to $49,500, bought between Feb. 17, 2009, and the end of the year is deductible on next year's tax return.

Financial physics still apply
Don't let the thump of up to $4,500 in "free" money hitting the table distract you. Negotiate on a new car the same way you always would. The only thing different is that all the parties involved know exactly what the trade is worth upfront.

MSN Money personal-finance columnist Liz Pulliam Weston recommends buyers limit loans to four years and put down at least 20% of the price of the car. Her car-buying rule of thumb: Keep payments to no more than 10% of your monthly gross income.

For many people, that means a fairly cheap new car. But they're out there. (Here's MSN Autos' look at new rides under $10,000.) With a $4,500 voucher as a down payment and a four-year loan at 7.5%, the payments on a $10,000 car would be about $133. You can see current loan rates here.

For someone with subprime credit -– a FICO score of 620 or below -– rates could easily top 15%, adding $50 a month to the payments on that $10,000 car.

If your credit is bad, even a car with $4,500 on the hood is a mistake.