Used Car Prices Are Set To Drop: Here’s Why

New car sales in the UK have been one of the few success stories of the economy in recent years. Reports from earlier in the year point to the best February sales period since 2004. That’s pretty good going for an economy still trying to recover from a recession.

1999 Rover 75 2.0 V6

According to the FT, there were almost 84,000 new car registrations in February – a jump of 8.4 percent from the previous year. It’s clear that the automobile industry has had an excellent start to 2016 – and long may it continue, of course.

There are a few winners and losers. For example, Volkswagen sales have dropped by 13 percent – of course, their reputation is undergoing something of a dip. That said, sales for the VW-owned Audi is up by 22 percent, so things aren’t going too badly for the group overall.

On the face of it, this is great news. But, is there a problem? Reports also suggest that buyers of new cars are increasingly relying on finance to make their purchases. It’s no surprise – with interest rates so low, there are some good deals available. In fact, financing rose by 10 percent from 2014 to 2015. Similar figures are occurring in the USA – and it’s causing a little worry amongst financial experts.

Why? Well, there are similarities between the auto markets of today and the subprime home loans of before the financial crisis. People are, perhaps, borrowing more than they should, just to drive the car of their dreams. And, in the States, the auto sales boom is almost entirely financed by debt.

The issue is depreciation. On average, a car loses 48 percent of its value after two years, while interest payments can add on up to a similar amount by the time the loan period ends. And, once those leases finish, there tends to be a flood of cars being shifted into the used car markets.

All cars depreciate, of course. But, when combined with loans it can become an expensive business. There could be some difficult times ahead for people that will be unavoidable. But, let’s face it – if you bide your time, you can work this to your advantage.

It’s worth keeping an eye on the usual used car markets. Auto magazines and the likes of www.carbase.co.uk will be the first ports of call for anyone in the market for a second-hand vehicle. With an excess of cars coming out of their loan period, you can bet that the used market prices are going to drop as supply closes the gap on demand.

It will be good for car dealers, too. Their profit margins may not be as healthy, but they will have the opportunity to build up more stock and offer their customers much better deals. Nothing creates a client list better than excellent discounts, and the potential for growth is clear to see.

As ever in life, there are winners and losers in the auto trade. Right now, it seems that those that can ill afford to finance are the people that will lose out. If all goes as suspected, everyone else should benefit from cheaper used cars in the next couple of years.

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