Falling car prices trap owners in 'negative equity'

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Car owners are facing a crippling combination of increased running costs and a dramatic slump in the value of their vehicles.

Car owners are facing a crippling combination of increased running costs and a dramatic slump in the value of their vehicles.

While the cost of running a car has far outstripped inflation and risen by more than 60 per cent in the past 10 years, millions of motorists are discovering that their cars have little or no trade-in value. Thousands more who took out loans to buy their cars are in a negative equity trap, whereby they now owe more on their cars than they could get from selling them.

Over the past two years, £15bn has been wiped off second-hand car prices as dealers try to compensate for being forced to drop the prices of new cars. CAP Monitor, the confidential industry price guide, estimates that around 11 million of the 26 million vehicles on the road have no "viable sale value".

This week the Alliance and Leicester and What Car? magazine will publish details showing price falls of up to 25 per cent on used cars, with industry analysts predicting this figure may rise to 35 per cent over the coming year. A Ford Galaxy bought two years ago for £24,000 might now be worth just £9,400, while a Vauxhall Corsa purchased six months ago for £7,500 would probably fetch no more than £4,000 today.

The value of used cars has nosedived following a series of campaigns by consumer groups protesting at what they consider to be the "rip-off" prices of new cars in the United Kingdom. A recent European Union survey found British motorists pay twice as much for some cars as their continental counterparts.

Phil Evans, of the Consumers' Association, said: "New cars were so massively over-priced that sales just dried up. Now they are being forced to bring down prices but they are trying to hold on to their profits by dramatically marking down the trade-in price of second-hand vehicles."

At the same time, the expenses involved in running a car have risen significantly above the rate of inflation. While the cost of living has increased at an inflation rate of 37 per cent since 1990, the expenses involved in driving have increased by more than 59 per cent. Campaigns to force down the price of fuel, culminating in a "dump the pump" boycott of petrol stations last month, are unlikely to have much long-term effect.

Petrol prices fell from 86p-87p in June to the current average of 81p in response to consumer outrage but oil companies are under pressure to increase them again after the cost of crude oil surged to its highest level in 10 years.

After their home, a car is the largest purchase most Britons make and recent research by the Automobile Association showed that the average weekly bill for running a car is £79, which means more spent on motoring than on homes or food. So high are the expenses, that thousands of drivers are now choosing to lease their cars, rather than buy them.

An AA spokesman, Michael Johnson, said: "It has got to the point where people are beginning to ask whether it is worth buying a car at all. Leasing cars is becoming increasingly popular because many people are realising that in some cases it can be cheaper to hire a car than to buy it."

Drivers prepared to commit themselves to a new car for four years, for example, could save up to £1,000 a year by leasing it rather than buying it, according to PricewaterhouseCoopers, which this month launched an internet-based private leasing company.

It said the true cost of buying and running a one-litre car was around £2,700 a year, excluding petrol and insurance. That figure includes the annual road fund licence, repairs, maintenance and depreciation, which few realise is by far the largest cost of ownership. By choosing to lease instead of buy, the annual running costs came down to £1,700 a year for the same car, the company said.