While I am all for helping the economy and the environment, the awesome thing about a clunker is that is (hopefully!) paid for in full. If you are one of the more than six hundred thousand who got cash for your clunker, you are the proud owner of a new car… and possibly some new debt.

Let’s run some rough numbers. The popular Honda Civic costs around $21,000. If you qualified for the full $4,500 CARS credit for your clunker, that leaves you with $16,500 owed.

Loan amount:         $16,500
Interest rate:                   9%
Loan term:          48 months
Monthly payment:   $410.60

The fact that many people were in a rush to beat the program’s deadline concerns me. A National Automobile Dealers Association economist was interviewed for a recent Newsweek article saying that he believes that “as many as 40 percent of the cars purchased under Cash for Clunkers were bought by people who would not have bought a new car in this calendar year.”

Adding more than $400 to your monthly obligations is not something that most people can do without a lot of planning. To make matters worse, according to Insurance News Net, insurance costs for some new-car buyers could be minimal; for others, it could be $500 or more a year.

If you find yourself suddenly facing a dramatic increase in your monthly credit obligations—for any reason—you will likely have to adjust your spending in other areas to compensate (giving a car back is not a realistic option). Thankfully, there are several budget areas where you can make quick cuts. Check out previous blog posts for quick ways to reduce your expenses on items like:

-Food
-Energy
-Childcare
-Pet care
-Travel
-Entertainment
-Gifts

Plus, this great post from the Bargain Babe on 13 ways to reduce your spending.

Cash for Clunkers, or the $1 billion government funded program officially named Car Allowance Rebate System (CARS), looks to be getting an extension. Congress is planning to invest an additional $2 billion into the program in the form of government stimulus rebates of up to $4,500 per clunker. The first phase of the program was wildly successful wiping out the initial $1 billion investment more than four months ahead of schedule. The success of this program will do a lot for the auto industry, but ask yourself – what will it do for your bottom line.

Buying a new, more gas efficient car, means less money for gas, but more money for monthly car payment and insurance. People who own clunkers are more than likely not locked into a car loan. Going from zero monthly payments to paying more than $300 a month on average, could make a huge impact on your family’s budget.

When shopping for a car, using the Cash for Clunkers incentive, the same fundamentals of buying still apply. The key is to do your homework:

Determine what you can afford. Review your spending plan and determine how much you can allocate each month for the car payment, gas, insurance, registration and maintenance.

Get the best deal. Shop around for the best offers. With new car sales at a 27 year low, car dealerships are offering amazing rebates and incentives. In addition to the government rebate on fuel efficient cars, you may also qualify for thousands of dollars in dealer incentives.

Consider new vs. used. Carefully weigh your options and consider the loan terms on a new car vs. a used car. According to Bankrate.com, the average used car rate is 7.5 percent and the average on a new car is 2.9 percent, which means you could save more over time on a new car.

Finally, shop around for the best rate. Credit unions and smaller finance companies may offer better loan terms than larger lenders.

What you should know about the Cash for Clunkers program:

• The purchased vehicles, which must be new (2008, 2009, 2010 models).
• The vehicle can not cost more than $45,000.
• Motorcycles are not part of the trade-in or sales process.
• Your clunker has to be in driveable condition.
• You must have a clear title to present to the dealer; no liens.
• The person on the title of the clunker has to be the same person who is buying the new car.