When you’re in the market for a new car and the finance needed to drive it away, the total cost over the length of the agreement – and at the end of it – is a vital consideration. If you’re entering into a finance plan the depreciation of the vehicle won’t have the same impact as it would if you owned outright, but it does play a part in the calculations behind the agreement.
Unless you’re buying a collectible classic or a limited edition supercar, it’s pretty much a given that new vehicles will depreciate in value over their lifetime, particularly over the first two or three years.
Also known as Guaranteed Minimum Future Value, the GFV is how the finance provider guarantees the car’s minimum future residual value regardless of true depreciation. This is the estimated figure that will be outstanding at the end of the finance term, at which point you’ll decide whether to keep the vehicle by paying the balance – called an Optional Final Payment or Balloon Payment – or to hand it back, or to trade it in.
This guarantee helps to minimise your risk from depreciation. If your car drops in value more than was predicted, the finance company will incur any shortfall. You could hand it back with nothing more to pay – even if, at that time, it’s worth much less on the actual market than the GFV.
All sorts of outside factors can exacerbate depreciation, and some cars can drop in value more quickly than comparable models. So having a GFV brings real peace of mind should second-hand prices plummet unexpectedly. It’s the finance company that carries the risk, not you.
The GFV is worked out using factors such as your estimated mileage, the length of your agreement, and the brand and model of vehicle. Your monthly finance payments are then calculated by taking the new car costs, minus any deposit, plus interest.
Do remember to read the small print of your finance agreement, however. The GFV is based on an agreed mileage allowance. This is the anticipated maximum number of miles you have committed to driving in your vehicle throughout the term of the contract with the finance company. Exceeding this figure may affect the value your vehicle might achieve when eventually sold or traded in, and so may have an effect on the GFV or incur penalty payments.
‘Fair wear and tear’ is another consideration to bear in mind. If your car is in less than ‘reasonable’ condition for its age and mileage at end of finance term, or you haven’t kept up with official servicing and maintenance schedules, it could cost you.
You don’t have to do anything extra to organise a GFV; it’s a component part of every PCP, so it is calculated at the same time as setting up the contract via your dealer or finance provider.