Stick or Twist?

Saturday 25 April 2009

There’s a new dilemma facing the owners of nice, newish cars in the current credit-crunched economy – is it better to sell up now and move into something cheaper, or should they keep the faith and hang onto their motor in the hope the market will pick up? Used car values have been sliding at the same time as new car sales have collapsed, and now tens of thousands of punters are discovering both an urgent need for cash, and that their nearly-new car is worth far more than they paid for it.

The values of big 4×4s have suffered the worst collapse – and nothing has been immune. For several years after it was introduced the current Range Rover was almost depreciation-proof – I can remember getting excited when early versions dropped below £25,000 for the first time a couple of years ago. But now the combination of ferocious running costs and plunging values means that you can hardly give the things away. The cheapest I’ve seen so far was a ‘51-reg HSE fitted with the gas-guzzling V8 petrol engine and wearing just over 100,000 miles – it was kicking around the trade locally for £7000 and finding no takers. How the mighty have fallen.

But it’s not just big off-roaders that are affected – pretty much every bit of the market has been hit. And the unluckiest punters are those who are now finding that their car is suffering from what’s called ‘negative equity’ – it’s worth less than the finance still owing on it.

I heard about a fairly typical scenario last week from a mate who manages a Toyota dealership. A guy with an ‘07-reg Mercedes CLK350 comes in desperately needing to swap it for something more fuel efficient. It turns out that the bloke used to be a highly-paid IT consultant, but after work dried up he’s been forced to take a job that pays far less and involves a 75 mile commute each way.

Anyway, the punter is interested in a diesel Auris and my mate tries to get his CLK ‘underwritten’ by somebody else in the trade – guaranteeing the value he can give for it as a part-ex. The price guides reckon that it’s still worth about £18,000, but coupes just aren’t selling and my friend can’t find anyone who’ll bid more than £15,500 for it. The bloke is devastated – not only did he fork out more than £40,000 for this thing two years ago, but its worth less as a part-ex than he still owes the bank for it. Even with a super-keen price on a nearly-new Auris, that means he’s going to have to find nearly two grand in cash just to get out of the Merc – money he just doesn’t have.

The upshot? The punter is keeping the CLK and scraping together payments for it in the hope the market picks up – and in the meantime he’s looking to buy a diesel banger for the run to work.

And it’s not just people who need to cash out of their existing cars who are being hit by the slump in values. A big part of the new car market consists of customers who change their cars on a regular basis, with many of these funding the purchase with so-called ‘PCP’ schemes – sometimes known as ‘balloon’ payments. Even if you’ve never had one you probably recognise the sort of thing: the punter puts down a deposit, pays off a chunk of the balance on finance and then, at the end of the contract, has to either come up with the ‘balloon’ payment of the remaining amount, or alternatively hand the car back.

Of course, there’s a clever whizz to try and keep the punters buying new cars – the car’s guaranteed value, which underwrites the final payment, is always pessimistically set – meaning that the car is likely to be worth more, and that therefore it can provide a nice deposit for another new car.

Well, that’s the idea – but as prices slide, more and more cars are worth less than their guaranteed value, meaning the punter doesn’t get anything towards their next deposit – and that they would be mad to actually pay more than the car is worth to buy it. The net result is even more cars that just aren’t being sold.

So, if you’re stuck with a rapidly depreciating new car and want to get out, what should you do? The answer depends on just how desperately you need thr cash, to be honest – if it’s a choice between losing your car or your house then you’d be mad not to go for the former option. But it’s worth pointing out that falling fuel prices have already helped to rally the values of the biggest gas guzzlers. I wouldn’t be surprised if, within the next couple of months, other bits of the used market enjoyed a bit of a rise, too. But you’d be brave waiting to find out.