Car-scrappage scheme will cost you money!

The car-scrappage scheme will cost most people more money and save them nothing.

The UK has finally leapt on the bandwagon that's been rolling across Europe by deciding that its residents can get money for scrapping its old cars and buying brand new ones. The Government has set aside £300 million for it, which will pay for 300,000 old vehicles. The deal will last for about ten months, starting some time in 'mid-May' 2009 and lasting until March next year. Alternatively, the deal ends when the money runs out.

This scheme was in Wednesday's Budget, in the section called 'Supporting business'. It will support some manufacturers and car dealerships, so that makes sense. It could have been put in the the section about supporting people, but that would have been false.

Here's the deal

Before I go on to explain why, here are more details of the scheme. You can benefit from this scheme if the dealer and manufacturer have agreed to take part only. You'll then get a £1,000 discount on your brand-new vehicle from the Government and another £1,000 from the manufacturer.

The dealer will be responsible for scrapping the old vehicle and filling in the paperwork the Government requires. That will probably put off some dealers, whilst being seen as a reason to add further admin charges by others. Some manufacturers probably won't participate. In Germany it's just manufacturers of smaller, cheaper cars that have benefited, which means manufacturers like Jaguar Land Rover may choose not to get involved.

On the old vehicle:

• You can trade in cars, and commercial vans weighing up to 3.5 tonnes.
• The vehicle must have first been registered on or before 31 July 1999.
• It must have a valid MOT certificate.
• You must have owned it for at least 12 months.

The new vehicle must also be a car, or a van of no more than 3.5 tonnes, and must have UK-specifications.

Why it's not a good deal

There are lots of reasons why this doesn't help customers:

• You have to buy through a dealer. This is not likely to extend to car brokers and car supermarkets, which are normally thousands of pounds cheaper.
• Dealers typically have a high mark-up and expect people to negotiate. They already deduct £1,000 or more on many vehicles without too much pressure, so that people feel they've got a bargain. This means that many dealers will simply replace their own discount scheme with the Government's, so you'll likely benefit from just the manufacturer's £1,000 at best.
• Many manufacturers will also lose the incentive to run their own discount schemes in addition to this one.
• If your vehicle has a valid MOT then it's probably worth at least £500, so the deal is worth just £1,500 or less to you.
• Brand-new cars lose a huge portion of their value immediately. Once you've signed the ownership papers for a £10,000 car, you'll normally be able to re-sell it for roughly £6,000 to £8,000; that's £2,000 to £4,000 less in an instant.
• Overall, this scheme will encourage people to buy vehicles they otherwise wouldn't have done, and they won't make any real gains from it. After adding on the cost of the loan to buy the vehicle, it's just as expensive as ever to get a new car.

My tips

Here are my tips:

• Consider whether you really need to give up your perfectly good old car and buy an expensive one that'll instantly lose maybe 25% of its value or more.
• Dealers offer advice, but all the information you need is on the Internet now. A dealer's advice isn't worth the thousands of extra pounds it charges!
• Try a car supermarket, where you'll get much cheaper vehicles even without the £2,000 deal.
• You can then sell your old car yourself, getting some real cash out of it!
• If, nevertheless, you decide to go to a dealer, don't tell them you have an old car. Lie to them. Once you've done your best to negotiate a better deal, you can then tell them you do actually have an old car and that, on reflection, you would like to trade it in for the extra £2,000 off! Otherwise, the dealer won't offer you any extra discounts on its own.

Second-hand is better

Finally, people should seriously consider just buying a good, second-hand car. You can buy an almost new vehicle for thousands of pounds less. It's also better for the environment if we re-use existing  new cars instead of making more of them.

The Government's scheme might have the knock-on consequences of raising the cost of second-hand cars, but I shouldn't think it'll be too significant.

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