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Car owners hit by negative equity

12-6-2008
Thousands of drivers have been warned that they may end up in negative equity because of the Government's Vehicle Excise Duty changes. 

Cars between one and three years old could slump in value by 25% this year, compared with normal depreciation of about 19%, according to Glass's Guide. 

The used car value experts blame the credit crunch as well as VED changes, which will see road tax on some larger family cars more than double to £440 from April next year. 

Thousands of drivers who buy their cars using finance deals such as personal contract purchase (PCP) could find they are saddled with debt worth more than their car. 

Under a PCP, dealers set a minimum guaranteed future value (MGFV), which is a conservative estimate of how much the car will be worth at the end of the contract period, typically three years. 

Buyers put down an initial deposit and then make monthly repayments based on the remaining value of the car, less the MGVF. Interest is charged on the MGFV as well as the outstanding balance. 

At the end of the contract period, buyers have the option of either paying the MGVF and buying the car outright or handing the car back. In the past, drivers have found their cars worth several thousand pounds more than the MGFV at the end of the deal. They could then use this money to put a deposit down on another PCP deal. 

However, cars are increasingly worth less than the future value given at the time of the purchase so customers have to either relinquish the car or end up paying a final payment that is more than the value of the car. 

Matt Sanger, of What Car? magazine, said: "Many people will not yet realise the extent to which their cars have depreciated. We expect this to happen in the next six months or so as they come to the end of their agreements." (Sunday Times)