25 May 2023
Guaranteed Future Value (GFV), also known as a balloon payment or residual value, refers to the predetermined value of a vehicle at the end of a car finance agreement. It is an agreed-upon amount that the car will be worth at the end of the loan or lease term, regardless of its actual market value at that time. The GFV is established at the beginning of the finance agreement and is used to calculate monthly payments.
Understanding the concept of Guaranteed Future Value is important for individuals considering finance options such as Personal Contract Purchase (PCP) or Hire Purchase (HP). The GFV affects the monthly payments and provides flexibility at the end of the agreement. It allows borrowers to choose whether to return the vehicle, trade it in for a new one, or pay the GFV amount to keep the vehicle.
Suppose you enter into a car finance agreement using PCP, where the loan term is four years. At the beginning of the agreement, the lender sets a GFV of £10,000 for the car. Based on this GFV, your monthly payments are calculated, covering the depreciation of the vehicle over the loan term. At the end of the four-year term, you have three options return the car to the lender, trade it in for a new car, or pay the GFV amount of £10,000 to own the vehicle outright. The GFV provides flexibility and options for the borrower at the end of the finance agreement.
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