Is it the end of the road for 'bangers for cash'?

The Government's car scrappage scheme could run out of cash in October – four months early. It means anyone thinking about taking advantage of the scheme – which gives you £2,000 for your old banger – needs to act now.

The Government introduced the scheme in this year's Budget with the aim of boosting the motor industry and stimulating consumer spending. Under the scheme, motorists who scrap cars and vans registered before 31 August 1999 are given £2,000 towards the cost of a new car, half from the Government, half from the car firm. It is due to end in February, or when the £300m the Government has allocated towards it runs out – whichever happens first.

But the latest government figures show that almost two-thirds of the cash has gone. The figures show that 205,112 cars and light vans have been ordered through the scrappage scheme since it went live in May. With sales continuing to grow, the funding for the scheme could be exhausted by October, especially with the boost to sales produced by this month's new 59 car number plate.

Motor dealers have been delighted by the scheme's success and are demanding it be extended. Paul Williams, chairman of the RMI National Franchised Dealers Association, the trade body for new car dealers, says extending the scheme wouldn't even cost taxpayers a penny, because of the increased cash brought into government coffers through the extra VAT raised. "Because scrappage sales are purely incremental, the VAT earned on them has made it a self-funded scheme. To say the scheme has been successful since its introduction would be a massive understatement. But with the retail economic climate still fragile, an extension of the initiative is vital," says Williams.

Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders, agrees. "The scrappage scheme is proving hugely popular with motorists and has provided an important boost to the UK motor industry. The scheme is clearly delivering environmental and safety benefits, in addition to incremental business for UK manufacturing and much-needed demand for retailers," he says.

But Business Secretary Lord Mandelson has ruled out extending the scheme. However, not everyone is in favour of the project. Ed Bowsher of consumer finance website lovemoney.com says: "Yes, the car scrappage scheme has boosted car sales, but I still don't believe it was a prudent use of government cash. Eight out of 10 cars sold in the UK are manufactured abroad, and only one of the top 10 UK best-sellers is made in the UK – the Vauxhall Astra. The only real beneficiaries of the scheme are car dealers, but why do they deserve government support ahead of many other struggling businesses?"

Putting that aside, the scheme has boosted the value of second-hand cars, according to CAP Motor Research. It says prices have risen by up to 30 per cent this year, leaving the average family saloon now worth £600 more than it was in January.

The scheme has also uncovered one or two old classics that have been languishing unused in garages and is set to give them a new lease of life. Typical is a 1958 black Morris Minor (pictured) which was traded in towards a new Hyundai Coupé in Gatwick. The black two-door Minor is described as being in "museum-quality" condition by one independent expert and is set to be used as a display in a museum.

If you are in the market for a new car, then the scrappage scheme could clearly help cut the cost of your new vehicle. However, before signing up to the scheme, it can be worth looking at other deals or discounts that may be on offer, says Joe Pattinson of BMW Group Financial Services. "I would advise customers to check the terms of any finance offer including scrappage, as there may be other offers available which are better under certain circumstances."

Indeed, anecdotal evidence suggests that calling up a car dealer and telling them you're a cash buyer wanting to snap up a motor right away may encourage them to make you an offer that is more attractive than a scrappage deal. If you can't get a discount, you could try to persuade a dealer to throw in some accessories such as new car mats or six months of road tax.

It does seem that people leave their sensible heads behind when shopping for cars, as more than two-thirds of motorists admit they don't do any research at all on the finance deals available. According to an Esure poll, only 13 per cent of motorists spend more than a couple of hours finding the most suitable finance option before signing on the dotted line.

Motorists also choose the easiest option when it comes to car finance, which can prove to be a costly mistake. One in seven says they took out dealer finance when buying their last car, one in 10 used a personal loan, while around one in 20 just swiped their credit card for the full amount, which undoubtedly ending up costing them more than it needed.

Whether or not you use the scrappage scheme, finding the right finance is a must.

Trading up: How the scrappage scheme works

The Government provides a £1,000 incentive, which is matched by vehicle manufacturers, for consumers to replace their 10-year-old or older vehicle with a new one. The old vehicle must be a car or small van and have been registered in the UK to the consumer for at least 12 months. The scheme applies to commercial vans (up to 3.5 tons) as well as cars that are 'T' registration or older.

The scheme will last until February 2010, or until the government funding has been used. Funding is available to scrap up to 300,000 vehicles, with 205,112 signed up by 6 September.

To take advantage of the scheme, you need to contact your local dealer to ask if they are operating it. Some 41 motor manufacturers have signed up, so most dealers should say yes. They will check your vehicle and the new vehicle you want to buy to ensure both meet the rules of the scheme. When the sale is agreed, the dealer will sort out the paperwork and arrange for your vehicle to be scrapped. The discount is deducted from the price you pay for the new vehicle and will be shown on your invoice when you take delivery of your new vehicle.

'I traded in my old Ford Mondeo for a sporty new BMW'

"The scrappage scheme came at just the right time for us," says Lyn Butler. "I took voluntary redundancy earlier this year from a job in the trucking business where I had a job with a company car. I needed to get a new car to drive to my new job and the scheme meant I could trade in the family's old Ford Mondeo," says the 44-year-old from Preston, who now works as deputy director of HR at her local university.

"I'd had a BMW at my old job, and trading in the 12-year-old Mondeo for scrap meant I could afford a new BMW 116i Sport. It was £18,500 but cost only £16,500 through the scheme, and I've arranged to buy it over three years through a BMW Select finance agreement, which comes with 12 months' warranty.

"If it hadn't been for the scrappage scheme, we would have ended up buying a second-hand or as-new car."