Experts have warned that due to plunging car prices thousands of motorists are in 'negative equity' on their vehicle loans. It means many car buyers are in similar positions to those whose mortgages are bigger than the value of their home. Altogether the total amount that is owed on car loans and the value of the vehicles could be as much as 272 million.
If you have bought your car on a personal contract purchase (PCP) finance deal the problem is a lot worse. The total amount owed last year was 2.13 billion pounds. These contracts usually involve making a series of monthly instalments. You then make a final payment after two years to secure ownership of the car. This is based on what the vehicle is predicted to be worth.
However, these estimates are now highly inaccurate, as predicted future values proving to be much higher than the current value. These shortfalls have found to be as much as 49 per cent between some car's predicted value and their actual value in the economic downturn.
An example of this is: a two year old Volvo XC90 with a predicted value of 18,775 pounds now has an actual value of 12,600 pounds, according to research by the magazine Auto Express based on figures from CAP, the car data analysts. A 3 year old BMW 750i with a predicted value of 22,400 pounds is worth 15,600 pounds, a drop of 44 per cent.
A spokesman for the AA, said: 'This is shocking news. Many people will suffer.' He said this will harm the new car market as well as negative equity on cars stopping buyers from taking up such finance deals.
The Finance and Leasing Association said that it was important that drivers remembered that car values could end up higher or lower than the MGFV. However, as buyers had the option of simply handing back their keys, the risk was with the dealer, rather than the buyer.
The gentleman from the AA said: 'Those who have had their fingers burned will not have any incentive to buy another new car under this type of deal.' An Auto Express spokesman said: 'The slump in values means drivers who bought their cars on PCP are left with a final payment that's more than the vehicle is worth. It leaves drivers out of pocket.'
The credit crunch and recession has led to a slump in car sales so motorists are caught in a vicious spiral. This has then hit the resale values of cars when drivers come to resell or trade in their vehicles. It does mean bargains for buyers though, but those trying to sell or trade in their cars will find their vehicles are worth thousands of pounds less than they had hoped for.
In the last year sales of new cars plummeted by 37 percent, the worst fall for more than 28 years. Makers of top end luxury and sports cars, large 4X4s and 'gas-guzzlers' are bearing the brunt of the crash, with sales drops far in excess of that average.
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