Finance industry experts are warning dealers to be cautious about long term lending which leaves customers with high depreciation and low equity. They say the trend to long term loans, combined with falling residual values, is forcing the market into an unnatural replacement cycle and fuelling the growing number of 'hand backs'.

Used car specialists have reported a “huge increase” in the number of customers simply handing back to finance companies cars which are worth less than the money still outstanding on them. The practice is perfectly legal under the Voluntary Termination clause of the Consumer Credit Act 1974.

Under the Act, customers can hand back the car provided they have paid all the instalments due up to the time they terminate, and that the paid-up amount is at least half the credit price of the vehicle. The clause applies to any finance arrangement where the vehicle is not owned by the customer until the final payment is made, such as conditional sale or PCP.

Miles Roberts, Singer & Friedlander assistant director, is a persistent critic of long term lending. He says it is time to start a more responsible pattern of lending. “Over the last year we have seen a growing number of consumers financing their vehicles over a five-year period,” said Mr Roberts. “With dealers under pressure to increase volumes, it is tempting to offer creative financing in order to make a sale more attractive. When calculated over five years, buyers appear to get more car for their money.”

Singer and Friedlander figures reveal the average length of ownership is 27 months, with many customers trying to change vehicles before a full 60-month contract has run its course. Once settlement charges have been taken into account, the customer is in 'negative equity' before the new agreement has even been signed and either has to move down market or be trapped in a finance cycle.