Buyers line up for old banger scheme, but will it salvage car sales?

As the industry revs up for scrappage, car makers must work out how to pay for it. Sarah Arnott reports

Budding car buyers have flocked to showrooms, both real and online, since the Government's cash-for-bangers scheme was announced in last week's Budget. But, as the contracts for participating suppliers were sent out from the Department for Business yesterday, questions remain about how much benefit either the industry or its customers will actually see.

The £2,000 incentive – to be funded half by the Treasury and half by the manufacturer – is for people trading in cars more than 10 years old for new models (see box). For an industry struggling with a 30 per cent slump in demand, anything that entices buyers back into the showrooms is a boon. Based on an average price of £10,000, the £300m scheme means 300,000 new customers. And although it will not be available until 18 May, consumers are showing a hearty appetite for a discount.

Hyundai dealers are reporting a 400 per cent jump in inquiries about its i10 and i20 models since the Budget. Kia, another Korean brand, has seen expressions of interest boom 117 per cent, and one dealer reportedly sold a record 14 cars last Saturday alone. Volkswagen has had 850 online applications on its scrappage page. Citroën's own £2,000 incentive, launched at the start of last month and to be rolled into the government scheme, has been taken up for 15 per cent of the 2,000 cars sold in April.

Some manufacturers are also extending the government package. Nissan, one of the only suppliers to sell small cars built in the UK, has 150 customers signed up since the Chancellor announced the scheme. It is also offering the same terms for slightly newer bangers traded in for new vehicles from its Sunderland factory.

Ford's scrappage web page, put up on Budget day, had more hits in its first four days than the site's previous top page – for the new Ford Fiesta – managed in the whole of March. For the most popular models, such as the Ka and the Fiesta, the incentive will remain at the basic £2,000. But bigger cars will be on a sliding scale up to a total of £5,000 off a seven-seater Galaxy. Ford's calculation is that it will win 20 per cent of the 300,000 new customers, equivalent to its existing market share, and can therefore afford the extension.

Not everyone is so sanguine. After a week of discussions between the Department for Business and the car companies, contracts governing the process were sent out yesterday. The Government will stump up its £1,000 for the manufacturer within 10 days of receiving an eligible claim from a retailer. The car company then has another 10 days to pay the dealer. But the concerns are less about the mechanism for receiving the money, and more about where it will come from. Not all cars have a £1,000 margin and several suppliers, although in support of the incentive, are looking closely at how to fund their share. Prices may be raised elsewhere, other incentive programmes cut, or future discount plans junked.

"The idea of scrappage is great but one pivotal point is not clear and that is where the industry's £1,000 comes from," Trevor Finn, the chief executive of Pendragon, the UK's biggest motor retailer, said. "If the manufacturer just substitutes an existing discount then the customer is not any better off. We want to be associated with an offer that's transparent, not generating a lot of inquiries but leaving us as the deliverer of bad news when it is not quite what it appears."

There are also questions for the beneficiaries of the scheme. The motor industry may see a lift now, but whipping up demand may set up conditions for a future slump. "As a stimulus it will achieve its goal, but there is a price to be paid," Mr Finn said.

The same may be true for the scrappers. Concerns about crashing scrap metal prices are overblown because demand is rising fast enough to soak up the extra supply, according to Graham Price, the manager of Cartakeback, a 250-site network of authorised scrapping facilities. But the plan is no bonanza either. "There will be an acceleration but it is not necessarily new business, just business that is being brought forward," Mr Price said. "And we don't know if that will create a big hole in the future or not."

Scrappage: What, when and how

*Am I eligible?

Providing your car or van weighs less than 3,500kg and is more than 10 years old, yes. It must have been first registered on or before 31 July 1999. It must also have been in your name for more than 12 months, have a valid MOT certificate, and have a UK address on the registration certificate. If your vehicle meets these criteria, you can claim a £2,000 discount on the purchase of a new one once the scheme starts on 18 May.

*What can I buy?

Because the car companies are being asked to put up half of the incentive, they do have the option not to take part. That said, all the major brands have already signalled their commitment. The Government has specified that the incentive must apply to all models, although some companies may offer extra subsidies of their own on bigger models. Ford, for example, is offering a £5,000 scrappage incentive to buy a new Galaxy. The formal conditions for the new purchase is that it weigh less than 3,500kg, that it be first registered in the UK on or after mid-May 2009, and that it has had no former keepers.

*What do I do?

It could be worth finding out the sale value of your banger so you know how much of the £2,000 incentive is a genuine bonus. If you decide to go ahead, you will need to make sure if your local dealer is participating but, as with the manufacturers, the majority should be.

*Do I need to bring anything?

All you will need to provide is the documentation associated with your old car and your own basic personal information. All the processing will be done by the dealer. The £2,000 discount will be recorded on your invoice.