The program is officially called the Car Allowance Rebate System (CARS) and went into effect on July 24, 2009, although some dealers were offering the program earlier.

Here is how the cash for clunkers rebate program works:

Your car must be less than 25 years old. It must be driveable. You must have owned it and had insurance on it for the last year. It must have had an original 18 MPG overall city/highway fuel rating, or less.

You must trade your old car for a new car with at least 4 MPG higher rating ($3400 credit) or 10 MPG higher rating ($4500 credit). SUVs, small pickups, and minivans only require a 2 MPG improvement, and vans and large trucks only 1 MPG improvement.

The new vehicle must be a brand new vehicle that has never been titled — not a used car. The list price (MSRP) must be less than $45,000. The minimum mileage rating for a new car is 22 MPG, or 18 MPG for a SUV, small pickup or minivan, or 15 MPG for large vans and trucks.

Your clunker trade-in vehicle must be destroyed by the dealer. It cannot be fixed up and resold. The idea is to get it off the road, forever.

The CARS cash for clunkers program is funded for “only” $1 billion. The program is over when the money runs out, or on November 1, 2009, whichever comes first.

[UPDATE:  The CARS program exhausted the entire $1 billion in the FIRST MONTH. The government has now added $2 billion more to keep it going — probably only for two more months. If you are thinking of taking advantage of this program, do it SOON.]

If your car qualifies, the $3500 or $4500 government rebate on top of any other manufacturer rebates and dealer discounts can make for some incredible car deals. You might even be able to work  out an almost free car.

What’s the catch with the program? If your old car is worth more than $3500 as a trade-in vehicle, the CARS cash for clunkers program is not advantageous to you. For example, if your old car is worth $5000 as a trade-in vehicle, it’s better to accept a dealer’s trade offer of $5000 rather than accept the government’s $3500 rebate.