- What is Guaranteed Minimum Future Value
- What is Personal Contract Purchase?
- How is the GMFV of your vehicle calculated?
- What are the benefits of GMFV?
What is Guaranteed Minimum Future Value (GMFV)?
Guaranteed Minimum Future Value (sometimes also referred to as the Optional Final Payment or Balloon Payment) is the amount that a car or van will be worth at the end of your contract term as calculated by your finance company. A number of different factors go into producing the final sum. The amount is determined regardless of the true depreciated value of the vehicle.
Over the course of its lifetime, every vehicle depreciates in value. Some, however, depreciate quicker than others. This means that some vehicles will end up with a lower second-hand value than others.
Once your agreement comes to an end there are several options that you can choose from and, whatever choice you make, regardless of current market value for the vehicle, the GMFV calculated at the start of your Personal Contract Purchase (PCP) is not affected.
When you take out a PCP agreement it is important you take the GMFV into account. This is due to the fact that the GMFV that is calculated by your lenders will be the sum that you will have to pay out at the end of your contract if you wish to purchase the vehicle. The GMFV will also determine your monthly repayment amount.
What is Personal Contract Purchase (PCP)?
Personal Contract Purchase (PCP) is vehicle financing for an individual purchaser. It has some similarities to the traditional Hire Purchase (purchasing with monthly instalments) and Personal Contract Hire.
PCPs are structured so that, over the term of the agreed contract, the individual purchaser pays a lower monthly sum leaving the GMFV (balloon payment) to be made at the end of the agreement (if you have decided you would like to purchase your vehicle).
How is the Guaranteed Minimum Future Value of your vehicle calculated?
At the start of a Personal Contract Purchase, the Guaranteed Future Value (GMFV) is calculated based on what the vehicle’s estimated value will be at the end of your contracted payment period. The final value also takes into account several other factors, including:
- Estimated mileage
- Brand of vehicle
- Vehicle model
- Length of the agreement
Once all of these factors have been calculated, using information obtained from various sources including trade guides and your vehicle needs (especially where mileage is concerned), your finance company will guarantee the resulting value as the minimum the leased vehicle will be worth once your contract expires.
The GMFV that your finance company comes up with is often set at a level that should provide you with a surplus amount that can be used as a deposit towards your next car or van – if this is the option you decide upon.
Many lenders will also, in order to protect the final value of your vehicle, set a mileage limit on your contract. Mileage can have a notable effect on the value of a used vehicle; the higher your mileage, the lower the final value of your vehicle. Placing this limit on your vehicle at the start of the agreement protects the GMFV. For every mile you go over the agreed limit you pay an excess mileage charge, which is usually a few pence per mile. Excess mileage charges vary by make and model of vehicle, so arranging a mileage limit that suits your specific needs is something that you will want to talk about when you’ve chosen your vehicle.
If you are intending to return your vehicle when your contract comes to an end then the mileage limit is important, as your lender will want to ensure that the value of the vehicle is as close to the GMFV that was set at the start of your lease as possible.
What are the benefits of GMFV?
If you’re looking for flexibility and choice when you come to lease a vehicle then Contract Purchase is a popular choice. Once you’ve decided upon the vehicle you wish you lease it’s a very simple process; you put down a deposit and then make regular payments of the amount agreed during the contract process. Lenders will calculate a GMFV that aims to provide you with an excess. It’s vital that you take the GMFV into account when you finalise your agreement as it will not only determine the balloon payment you have to make if you decide to purchase your car, but it will also play a role in deciding the monthly payments you make. It is possible for you to negotiate a higher GMFV in order to reduce your monthly repayments, though this will have an effect on your final payment. Our advisors can help you to make the right decision based on budget and agreement length once you have decided on your vehicle.
When your agreed contract period comes to an end there are three choices you can make about the next step with your vehicle:
- Return the vehicle – subject to mileage and condition of the vehicle you will have nothing more to pay
- Buy the vehicle – if you’ve decided that you would like to keep your vehicle you will need to pay off the GMFV (which is also referred to as a balloon payment or Optional Final Payment). This payment effectively ends your Lease Agreement
- Part exchange/Trade-in – if you wish to trade in your current vehicle for a new one the process is simple:
- Take your vehicle back to the dealer
- If your vehicle’s trade-in value is higher than the agreed GMFV then you can use this equity as a deposit towards your next vehicle.
With PCP you have the best of both worlds; an affordable monthly repayment plan complete with an ownership option and, as an added bonus, you will not have to worry about the resale value as this will have been set in stone at the beginning of your agreement.
What happens if the used car market falls in value?
The biggest advantage to Guaranteed Minimum Future Value is that it’s exactly what it says it is, guaranteed. Even if the value of used vehicles does drop the risk is carried by the finance company, so you’re safe. This means that if you decide that you wish to give your car or van back at the end of the agreement you can do so without losing anything.
Is GMFV right for me?
If you have any more questions about GMFV or would like to know more about the finance plans that we offer, please get in touch with our Vehicle Specialists on 01903 538835 or request a call back and we will be happy to help you choose the right arrangement for you or your business.