When purchasing a car through PCP, you make low monthly payments towards your vehicle. At the end of this type of car finance deal, you have the option of making one final lump sum payment to allow you to legally purchase the car once and for all.
This lump sum payment is known by a few names: the Optional Final Payment, the balloon payment, or the Guaranteed Minimum Future Value (GMFV).
When you finance a car through a PCP finance agreement, your Guaranteed Minimum Future Value will be calculated at the very start. The GMFV is an estimate of your car’s total value by the end of your agreement.
After the GMFV is calculated, your lender will use the difference between the car’s current value and its GMFV to figure out how much your monthly payment figure will be. This is because, with a PCP, you don’t pay for the car itself but rather for the amount of money it depreciates over the course of the contract.
Once your financial agreement has come to an end, you have several options. You can either trade the car in for a new model, return it, refinance it, or purchase it for the Guaranteed Minimum Future Value.
The GMFV, or balloon payment, offers a kind of protection from sharp, unexpected plummets in your car’s value. This is because your lender has already guaranteed your vehicle’s valuation.
By the end of your contract, if the vehicle is worth less than the GMFV, you are free to return it. Unless you have any damage or mileage penalties, you won’t have to pay a thing when you return your vehicle.
So, how does a GMFV, or balloon payment, work? As mentioned above, your lender calculates your GMFV by estimating what your car’s valuation will be by the end of your contract. This estimation is founded on several factors, such as depreciation, the estimated mileage of the car, and how that particular model of car tends to retain its value.
Over the course of your PCP contract, you will pay the difference between the GMFV and your vehicle’s value at purchase. These payments are made as small, monthly instalments that can best be understood as borrowing your car’s depreciation over the course of the PCP. During this time, you are essentially renting the vehicle.
At the end of your loan, you’ll be met with three options:
Imagine that you have purchased a new car on PCP finance for £24,000 and that the agreement will run for four years. Your lender estimates that by the end of that period, the value of your vehicle will have fallen to £16,000. This figure is the Guaranteed Minimum Future Value.
There is a difference of £8,000 between the starting value of the car and the GMFV. It is this £8,000 difference you will be paying over the course of your contract. You may have to pay interest in addition to this.
At the end of the four years, you will be free to decide whether you want to pay the GMFV and purchase the car, return the vehicle, or do a part-exchange with it.
At the beginning of your contract, you should be given a chance to negotiate a higher GMFV. This means that your monthly payments will be reduced.
Ultimately, the GMFV determines how much you will have to pay back to the lenders.
When calculating the value of the GMFV at the end of your PCP term, lenders make use of industry price guides. They also compare your model with other similar models, studying how they have depreciated over time.
It’s in your best interest to try and go with a model of car that will hold its value.
At the end of your PCP finance agreement, you have several courses of action available to you.
These options are:
Whether or not you should pay the GMFV is really up to you and your personal circumstances. However, if you’re interested in keeping the car, you will either need to refinance the balloon payment or pay the full GMFV outright.
Before you come to a decision, you should first have the value of your car evaluated by a car dealership or retailer. They’ll be able to let you know what value your car has. If it’s worth less than the balloon payment, returning the car is probably your best choice of action.
You will not get to buy the financed car. You will instead be able to get a cheaper second-hand model of a similar car.
Every now and then, you’ll find that your car is actually worth more than the GMFV. In this situation, you shouldn’t just return the car, even if you don’t really want to keep it.
Your options are:
You may find that your car is worth less than the GMFV. In this case, your best course of action would just be to return the car. Rather than paying out a GMFV that the car isn’t worth, you can let your lender deal with the loss of value instead.
To help you try and decide whether or not GMFV will be useful for you, here are some of the main pros and cons of GMFV.
|Pros of GMFV||Cons of GMFV|
|GMFV payments are flexible.||Cancellation fees.|
|You can purchase the car at the end of the PCP contract.||Large final payment.|
|Lower monthly fees.||Limitations.|
When you finance a car through PCP, it’s expected that you’ll maintain the car at a certain standard. By trying to stick to that as best as you can, you have a decent chance of increasing your car’s value. Furthermore, when you’re deciding on a model of car to buy, look for one that you know is going to retain its value.
This article has explained GMFV and its various pros and cons. Before deciding whether or not you want to make a balloon purchase at the end of a PCP contract, be sure to consider your particular situation. Decide whether or not another option might be better for you.