When looking at different finance agreements, we think it’s important that you know how the monthly payments are calculated. This is because transparency is key when it comes to getting a new car, regardless of whether you are leasing or buying.
So in this article, we’re going to look at how the price of a contract purchase is calculated, and how this affects the overall price.
How is contract purchase price calculated?
- Hand the car back with nothing more to pay
- Buy the car by making a larger payment, called the Minimum Guaranteed Future Value payment.
- Part exchange the car – any equity you make you can keep
However, this also means that the price is calculated a little differently.
When it comes to the likes of a contract purchase, the price of the car is stated on the finance documents, and this price includes any discounts that are on the vehicle. Manufacturers don’t really like the general public knowing how much discount has been put on the car. Therefore, they tend to offer those discounts in the form of deposit contributions or cash back schemes.
At the start of your contract you will be set a balloon payment. This is also known as the Minimum Guaranteed Future Value (or MGFV). This is how much your car is expected to be worth at the end of the contract. This is calculated based on the number of miles the vehicle is expected to do, the make of the car and the expected depreciation. There are some brands that depreciate much quicker than others, and therefore the price between two similar models can be vastly different. For example, Citroen and Renault depreciate very quickly so sometimes they can be more expensive than premium brands.
It should also be noted here that different finance companies have different Minimum Guaranteed Future Value payments, so it depends from funder to funder.
So, you take the MGFV and deduct this from the cost of the car. You then add the expected depreciation. This total is then divided by the number of months your contract is for. This total is you monthly payments.
But, you also have to take into account the interest.
How does interest affect contract purchase payments?
When it comes to a contract purchase, there are two different types of interest rates. There is a revolving interest rate and the normal interest rate.
The revolving interest rate pays the balloon payment because you’re never actually paying it back. It’s essentially like an endowment mortgage – you are only paying the interest, you still owe the same amount of money.
The normal interest rate reduces the more you pay. These two interest rates are joined together to give you an APR – this is added to your monthly payments.
How does the APR affect monthly payments?
With a contract purchase, the APR does not change depending on your credit score. This is the case with a hire purchase, but I have never seen it happen with a contract purchase. However, the higher the APR, the more interest you are going to pay, therefore, you are going to have to pay more monthly.
What affects the Minimum Guaranteed Future Value?
So, that’s how the price of a contract purchase is calculated. It might seem long winded but it’s important that you understand the pricing fully so you can ensure complete transparency when the time comes.