Money news, advice and predictions for savers and spenders. This week: the car scrapping scheme.
By Jeremy Gates
For every motorist who buys a new vehicle under the new Car Scrappage Scheme before the Government's promised £300 million subsidy runs out, another four drivers could be left disappointed.
That's an early prediction by Experian, the credit scoring specialist, which thinks 1.5 million drivers could be tempted by the scheme outlined by the Chancellor Alistair Darling in his April Budget - and swiftly dismissed in some quarters as "a load of old iron".
Are 1.5 million drivers still dreaming of a gleaming new motor? Despite scepticism, headline prices of many new vehicles have fallen sharply - for buyers able to present a qualifying old banger of at least 10 years old.
To the Government discount on a new car of £1,000, dealers can add a further discount of £1,000 (and possibly more) from 38 manufacturers signed up to the scheme.
If you really want a new car, it plainly makes sense to consider getting one now - or at least before the scheme expires, at the latest in March 2010.
On-the-road price for a five-door Kia Picanto saloon is now £4,195. My local Renault dealer says a Clio Extreme is down from £9,995 to £6,495, while a Peugeot 207 Verve falls from a list price £12,040 to £8,740 under the scheme.
Consumer group Which? reckons canny buyers of new Ford Mondeos might save £4,500 by the scheme.
To qualify for these knockdown prices, consumers must trade in a car first registered before August 1, 1999, which they have owned for at least a year. An old car must be presented for exchange with log book, valid tax, insurance and MOT documents (or be registered as off-road).
In the past month, say latest Government figures, 35,000 new cars have been purchased under the scheme, a fifth of the total market.
Car buyers aren't the only ones to benefit. Honda workers are back at work in Swindon after a four-month lay-off, and shares in Pendragon, one of Britain's biggest car dealers, are back from the precipice - up from 1p to more than 20p.
Gareth Lane, car industry analyst at price comparison service Confused.com, says: "Although some dealers and manufacturers are asking questions about how VAT is calculated on reduced prices, the scheme is helping to get older vehicles off the road and persuading drivers to switch to safer, greener vehicles.
"Dealers also have scope to offer parallel schemes which persuade motorists to trade in older vehicles, which might be important if funding runs out."
Lane says research suggests drivers using the scheme will choose smaller cars, meaning less carbon dioxide emissions and lower fuel consumption, and lower running costs as a direct result.
Automobile Association spokesman Luke Bosdet agrees: "The scheme means more vulnerable drivers on the road - younger drivers and old folk - will get better protection from new cars confirming to Euro-wide standards. A new small Fiat at £4,900 was unthinkable a few months ago."
Even the Government, it seems, could make a healthy profit if the scheme takes off: VAT payable on a £10,000 car is approximately £1,300, so 300,000 sales at that level would generate VAT receipts of £390 million, against the £300m paid in subsidy.
But what are the drawbacks of the plan?
One problem is that new vehicles lose value at a rapid rate as soon as they leave the forecourt.
The Car Scrappage Scheme already stands accused of cutting the value of second-hand cars up to one year even faster than usual, with British Car Auctions blaming it for a £2,400 fall in prices achieved on 'nearly new' vehicles in its April auction sale.
Research from price-comparison service uSwitch.com suggests the initial 'cash for bangers' bonus could be wiped out in depreciation in the first 88 days of ownership of a gleaming new vehicle.
Purchasing one of the top-10 most popular new cars costs an average £12,232, it says, and the value typically plummets 51% in year one.
The Ford Focus, the UK's best-selling car, loses £8,635 - or 51% of value - in its first year.
Mark Monteiro, insurance specialist at uSwitch.com, says: "While a £2,000 incentive may be enticement to motorists, even this payout can't hold its weight against the magnitude of vehicle depreciation.
"When choosing a new vehicle, motorists should research the likely rate of depreciation, because some of the top-10 most popular vehicles hold value better than others."
The second factor that car buyers must consider is insurance costs: comprehensive cover for a new vehicle is usually more expensive than for an old banger, because the risk of theft is much greater.
According to uSwitch, a 40-year-old male with nine years no claims would currently pay £154.66 to cover a 1999 Ford Focus Zetec. For a 2009 model, the premium rises to £200.98, an increase of nearly 30%.
On purely financial grounds, a one-year-old car - possibly a dealer's demonstrator model - usually offers better value than a new one by the scrappage scheme, Monteiro says. The owner gets two years of full warranty protection, against three on a new model.
"Any motorist considered participating in the Car Scrappage Scheme should get their car valued. If a car is worth in excess of £2,000, it is not beneficial to be involved, because you get more money selling privately," Monteiro says.
He reckons the original German version of the scheme - applying to new and nearly-new cars up to one year old, with larger discounts to around 5,000 euros - offers much better value to drivers.
But while many drivers want the thrill of a brand new car once or twice in a lifetime, they should heed the verdict from Richard Headland, editor of Which? Car magazine.
"Consumers most likely to benefit from the £2,000 incentive are those buying a small car, such as a city car or a supermini," he says.
"If a car's list price is £10,000 or less, the scrappage scheme delivers at least a 20% discount which is worth having. In most cases, manufacturers and dealers can't allow that kind of margin in standard negotiations.
Headland reckons a new Skoda Fabia, available under the scheme at £5,995, is a particularly good bet - with one-year-old models listed on websites at around £6,500.
"On bigger cars, however, it should be possible to haggle more than £2,000 off list prices fairly easily, with no need to scrap a banger to get it. It just takes sensible negotiation in this market," he says.
"I fear this scheme will have minimal impact on sales of larger cars, although the Government clearly hoped it would."
:: Information: Details of Car Scrappage Scheme available online at which.co.uk/advice/car-scrappage-scheme-explained. Current issue of Which? Car magazine is available in Sainsbury's stores for £3.99, with more on the Car Scrappage Scheme due in the July issue.
uSwitch.com : 0800 093 0607.
Poundnotes
:: Despite the plunge in interest rates since October 2008 as the Bank of England has battled to head off recession, only four lenders offer an APR of less than 8% on unsecured loans on £5,000-15,000, says Sainsbury's Bank, which finds the average rate currently 10.14%.
Sainsbury's Finance offers a personal loan rate of 7.9% APR typical, to Sainsbury's shoppers applying online with a Nectar card, with a personally tailored repayment period of 1-7 years and money available within 24 hours.
Sainsbury's Finance Loans (0800 169 8502 and www.sainsburysbank.co.uk).
:: The decision by parent company Santander to abolish its individual UK brands - Alliance & Leicester, Abbey and Bradford & Bingley - marks "the emergence of a banking super brand", says Kevin Mountford, head of banking at finance website www.moneysupermarket.com.
"Consumers must keep their eyes peeled to see how this will affect them," Mountford says, "as there can be no doubt that the consolidation period will leave some casualties. When all these brands are combined under Santander, expect a reduction in choice and competition on the High Street."
Andrew Hagger at Moneynet.co.uk says: "It is a bit like putting a new label on a tin of beans - if the contents are less palatable than you've been used to, you'll soon switch to a new brand.
"It remains to be seen if the 1,300-strong branch network will be gradually scaled down in the near future."
:: Savers setting money aside regularly to get the best interest rate may find that regular saver accounts have some strict rules in the small print, says Kevin Mountford at Moneysupermarket.com.
"The penalties for not paying enough money into your current account can be harsh, and some banks may close the account entirely," he says.
"Ultimately, account holders have to decide if there is a reasonable chance they will fail to fund the account as requested, and rewards may outweigh the penalties."
Lloyds TSB has upped the rate on its Monthly Saver account to 5% for savers who pay in £25-250 per month for a year, and have the freedom to increase the monthly sum if they find they have more spare cash available.
Lloyds TSB Current Account holders can open a Monthly Saver account either in branch or through telephone banking.
:: Anybody unlucky enough to be retiring in the near future, when financial prospects are so uncertain, should consider options carefully if they have at least £100,000 in their pot, says financial advisors Hargreaves Lansdown.
Nigel Callaghan at Hargreaves Lansdown says that fears of creeping inflation in the next few years might persuade some would-be retirees to take a tax-free lump sum now and leave the balance of their pension untouched and fully invested.
Others might opt to draw an income from a pension which can be stopped, started and varied at will.
Callaghan says: "The Government's huge borrowing needs could fuel inflation in years to come. Drawdown offers income today, while keeping a retiree's options open to benefit from possible higher annuity rates in the future should inflation return further down the line."
Hargreaves Lansdown enquiries: 0117 980 9926 and www.H-L.co.uk.
:: High-five savers:
Phone No Rate Account Period Deposit Interest paid
AA 0845 603 2295 4.50% (F) Telephone Fixed Rate Bond Five Years (T) £500 Yly
ICICI Bank UK www.icicibank.co.uk 4.40% (F) HiSAVE Fixed Rate Five Years £1,000 OM
Halifax www.halifax.co.uk 4.40% (F) Web Saver Five Years £500 Yly
Barclays Bank 0800 494949 3.55% Golden ISA Instant £1 Mly
United Nat Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly
Top-five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes
First Direct 0845 610 0100 2.89% variable for term 75% £799 Yes
HSBC 0800 494 999 2.95% variable for term 75% £799 Yes
Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £ 995 Yes
Loughborough BS 01509 610707 for three years 80% £449 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
