There are clearly conflicting components to this particular aspect of the game. On the one hand, we have a solid back-story that positively encourages violence, and that violence has substantial consequences to the players. On the other hand, we have to make a game, that doesn't end up being frustrating to play when you end-up being smashed, or even killed, while driving. Part of me wants to see cars getting blown apart in a shower of metal shards that let you know in no uncertain terms that your missile just hit home. Another part of me doesn't want to be the guy that got nailed, because what then? Do we want to be aping Doom where we just reload our last save-game whenever we get killed?
Much as I would love to see these kinds of serious consequences to damage in the game, I'm pretty sure it would end-up frustrating more than enhancing the experience. I think damage ought have some consequences however. Losing upgrades might be one way of portraying that - being damaged means you have to spend money on acquiring them again. Or maybe just a temporary performance degradation as your engine coughs and splutters as it tries to get the juice flowing again?
I think mostly, it's the satisfaction of causing significant visual damage to your opponent, making them look like they've taken a real beating, that is where the sweet spot is. It doesn't necessarily matter too much whether real performance is handicapped as a result, just so long as they look like they got whacked, and that they who it was that whacked them. So personally, I'd love to see these steel hulks in battle-worn state.