SCRAPPAGE SCHEME - THE PITFALLS

£2,000 incentive will be wiped out in just 88 days due to depreciation

• New vehicles purchased under the Government’s car scrappage scheme are set to lose £12.5 billion in depreciation after just one year
• Even with the £2,000 scrappage bonus, motorists buying the UK’s top ten bestselling new cars are still set to lose £527 each month due to depreciation in year one, totalling £9.5 billion
• On average, the initial £2,000 “cash for bangers” bonus is wiped out in depreciation in just 88 days of owning the new car
• Purchasing one of the top ten most popular new cars costs £16,232 on average, this value plummets by 51% in the first year alone
• The UK’s best-selling car – the Ford Focus Style – loses £8,635 or 51% of its value in the year one
• Drivers are urged to read the small print on car insurance policies as the write off value varies substantially between policies

New research has revealed that vehicle depreciation is set to be the ‘thorn in the side’ of the Government’s new car scrappage scheme.

In fact, the £2,000 incentive will be wiped out in depreciation within just 88 days of purchasing a new vehicle. With 1.5 million motorists tempted to cash in on the scheme, these consumers are set to lose a total of £12.5 billion in just one year.

Furthermore, even with the Government’s £2,000 incentive, motorists buying the UK’s top ten best-selling new cars are still set to find themselves £9.5 billion out of pocket due to depreciation in the first year, equating to a loss of £527 each month.

On average, the value of a new vehicle depreciates by £8,321 within the first year of driving it off the forecourt. This means the initial scrappage bonus is wiped out more than four times over within the first year due to the extent it depreciates in worth.

However, despite the harsh reality of vehicle depreciation putting the Government’s £2,000 scrapping bonus in a measly light, the research highlights how consumers are still attracted to the other benefits the scheme may bring. For example, the environmental benefits such an initiative could generate is a persuasive factor, with 37% of interested motorists saying their main reason for participation in the scheme would be to swap their car for a greener model.

Interestingly, nearly one in ten (8%) would-be car swappers cited that their main reason for partaking would be to ‘do their bit’ to support the struggling car industry.

Table 1: Depreciation of the UK top ten selling cars (against purchase price)

Double click the table above to see the figures more clearly.

Source: Depreciation figures from sales volumes from SMMT. (Averages weighted against SMMT sales data)

Levels of vehicle depreciation are based on various factors; such as the popularity of the car, the number of vehicles manufactured and the perceived value or quality of the brand among consumers.

The UK’s top ten best selling new cars on average cost £16,232 yet they lose over half their value (51%) in the first year alone. The UK’s best-selling car – the Ford Focus Style – loses £8,625 or 51% of its value in the first year alone. The worst performer is the UK’s 4th best-selling car – the Vauxhall Astra Hatchback Life – which suffers the highest level of depreciation in its first year at 67%.

On a more positive note, the UK’s third best-selling car – the Ford Fiesta Hatchback – depreciates the least, losing 38% of its value in the first year. It also costs a more consumer friendly £12,195.

The Government’s car scrappage scheme has been introduced to give the ailing motor industry a much needed shot in the arm by enticing motorists to participate with a £2,000 incentive.

However, whilst this is a positive bonus for consumers, it seems even this payout can’t hold its weight against the magnitude of vehicle depreciation, which dents the value a car from the moment you drive off the forecourt.

When choosing a new vehicle, motorists should ensure they research the rate of depreciation of their desired new car, as research highlights how some of the top ten most popular vehicles hold their value far better than others.

Any motorists tempted to take advantage of the car scrappage scheme should research the cost of insuring their desired new vehicle as a matter of priority, as the cost could be significantly higher than they are currently paying for their old banger.

All drivers who are planning to switch their old cars for a newer model need to be prepared for a hike to their premiums of up to 30%.

For example: A 40 year old male with 9 years no claims who currently owns a 1999 Ford Focus Zetec pays £154.66 for his car insurance. If he was to trade this in for a 2009 Ford Focus Zetec his insurance would be hiked to £200.98 – an increase of 29.9% for the new car.

BEWARE OF THE ADMIN COSTS, CANCELLATION FEES & INSURANCE PREMIUM HIKES

Consumers should also be aware of the extra administrative costs associated with changing an existing insurance policy.

When it comes to making such a change, there are two choices available; consumers can either buy a completely new policy or amend their existing policy.

Whichever choice is made, a mid-term adjustment fee is likely to be incurred and this costs on average £15.94. Alternatively, a hefty cancellation fee charging anything up to £75 may apply.

These extra charges mean that insurance providers are likely to be the winners of the car scrappage scheme far more so than consumers, as they will cash in on drivers making these mid-term policy adjustments.

Finally, consumers must read the small print on their insurance policy, as the write off value on insurance policies varies substantially.

Out of the insurers surveyed only eight providers replace a brand new vehicle written off in an accident within the first 12 months with an identical ‘like for like’ vehicle. Notably, Saga is the only insurer to offer this within a 24 months timeframe. Other providers, such as Admiral, Diamond and Elephant actually factor in depreciation, so if the car is written off in the first month of ownership the driver could lose several thousand pounds.

Table 2: Insurers ‘like-for-like’ replacements

*If vehicle is written off per terms and conditions of policy

Notes:-

1. 1.5 million drivers are likely to take advantage of the initiative – source Experian http://www.moneyfacts.co.uk/Article/81606/Scrappage-scheme-could-tempt-1-5-million-people.aspx

2. Average depreciation on a new car is £8321.10 in the first year, which equals £693.43 per month. Minus the £2,000 offset by car scrappage incentive this is £6321.10, which equals £526.76 per month.

Average 1 year loss multiplied by amount of people potentially taking advantage of scrappage scheme. 8312.10 x 1 500 000 = £12,481,650,000.00 Net loss against scrappage scheme multiplied by amount of people potentially taking advantage of scrappage scheme £321.10 x 1,500,000 = £9,481,650,000

3. Average depreciation on a new car is £8,321 in the first year. £8,321 divided by 365 = £22.79 per day. £2,000 divided by £22.79 = 87.75 days.

4. All figures based on 31,245,416 cars in use in the UK according to Research Insight
(June 2008).

Article source : www.uSwitch.com