The Auto Bailout: What's In It for Car Buyers

New incentives make domestic cars more appealing, but the best bet may be to wait for awhile.

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In order to bail out General Motors and Chrysler, the government has decided to throw a bone to car buyers, too.

Executives at the troubled Detroit automakers have long pointed out that nobody wants to buy a car from a company that might not be around in two or three years. That's why they've insisted that declaring bankruptcy is a road to ruin: It might allow their companies to shed debt and restructure, but even a small chance of liquidation would spook most buyers.

The government seems to have heard that complaint, which is why President Obama's provisional plan to bail out GM and Chrysler includes new protections for people who buy their products. Under Obama's plan, the government will fund a program to honor warranties on GM and Chrysler cars purchased while the companies are restructuring. Obama also plans to pursue a "scrappage" policy that could offer car buyers tax rebates or other incentives for trading in an old clunker and buying a new car.

[See why booting Rick Wagoner won't solve GMs woes.]

Those efforts may help boost sales, and provide a bit of confidence for buyers interested in GM or Chrysler vehicles. But there are still a lot of question marks. Here's what buyers should be thinking about:

Warranties. In theory, the new government guarantee means buyers shouldn't have to worry if they buy a car from GM or Chrysler and it malfunctions down the road. But there are still some unstated concerns. For starters, the government has left open the possibility of bankruptcy for both companies if they don't make radical changes, fast. Obama's automotive task force has expressed confidence that GM can survive if it makes necessary changes, but it only sees a future for Chrysler if it mergers with the Italian automaker Fiat—an iffy proposition. If either company fails, the government says it will "identify an auto service provider to supply warranty services."

Hmmm. Would the government warranty program work like the post office? Would you have to call a government hotline to get an appointment? There are no details yet, and of course everybody hopes the government will never have to get into the car-repair business. "There's the potential that this could be very problematic if the government starts administering warranties," says Jack Nerad of kbb.com. Consumers hoping for more clarity may not have to wait that long: The government is giving GM 60 days to come up with a more aggressive viability plan, and Chrysler 30 days to ink a deal with Fiat. At that point, the feds will either commit to billions in new loans or remand the automakers to the care of a bankruptcy court.

[See 10 cars Detroit should copy.]

Scrappage incentives. Obama has provided few details on this so far, except to say that he's working with Congress on a program to offer incentives designed to get older cars off the road. But f you're hoping to get a big bounty for a trading in a three- or four-year-old car, you can probably forget it. Scrappage programs are usually designed to get the oldest cars—which typically have the least safety equipment and pollute the most—off the road, which would dovetail with Obama's goals of introducing more green cars and reducing pollution. It's important to get the details right, since a poorly designed program can end up paying hundreds for old rustbuckets that would otherwise be headed to the junkyard. Since the biggest beneficiaries tend to be people with the oldest cars—drivers who may not be able to afford a new car anyway—this idea could have limited appeal to most consumers. But it might help clean the air and clear the breakdown lanes.

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Tax breaks. Obama also touted tax rebates for car buyers that were passed as part of the huge stimulus bill in February. The administration hopes this will boost car sales by up to 100,000 this year, but so far in 2009, sales have continued falling. That's obviously due to mounting job fears and spending cutbacks, as the recession worsens.

If the economy recovers later this year, more buyers may be able to take advantage of the deal. Basically, it allows buyers to deduct state and local sales tax paid on a new car from their income, which might amount to $300 off the price of a typically priced new car. On its own, that's not enough to convince most consumers to buy a new car, but if you're already planning to hit the showrooms, it might help. Some members of Congress would like to see additional tax rebates, though buyers should probably pay more attention to getting the car they want at a good price than waiting for further discounts courtesy of Washington.

[See 6 upsides to a GM bankruptcy.]

Resale value. The downside of cars that are heavily discounted today is that they'll be worth a lot less in a few years when you hope to trade them in or sell them. And one of the fears with regard to GM and Chrysler is that they'll start offering fire sales that will doom resale values.

But that seems less likely to happen now. Obama's task force, in fact, has encouraged the two automakers to end their practice of offering deep discounts to keep sales volumes up. There are still other key issues—like raising and sustaining quality—but "resale values are not going to fall off a cliff," says Nerad. They're already fairly low compared to standard-setters like Honda and Toyota. And if the Detroit automakers shrink as the government is now demanding, that could actually raise values.

[See why GM got a boost recently--and Chrysler got dinged.]

Prudent waiting. The new measures may bring a bit of stability to the car market eventually, but none of them gives consumers a new reason to rush out and buy a car. With sales down for virtually every automaker and category, it's a buyer's market, and it should stay that way for months. Anybody who really wants a GM or Chrysler vehicle has even more reason to wait, to see if they fulfill the government's demands or end up headed for Chapter 11. By summer, we should know.