When it comes to car finance, the most popular car buying method by far is Personal Contract Purchase, commonly referred to as PCP. For those with good or excellent credit, the affordable monthly payments combined with the flexibility you have at the end of the agreement make PCP the most sought after of all the finance packages. In fact, 82% of cars purchased on finance are through a PCP type of deal.
One of the most important things when it comes to PCP is the Guaranteed Minimum Future Value (GMFV) of your car at the end of the agreement. But what is GMFV? And how can you make your car worth more at the end of your finance package? Read on as we explain all you need to know about this important ingredient of PCP.
In a nutshell, GMFV is what the lender sets as the value of the car you are financing when you reach the end of the loan period.
When you apply for a car finance package, the lender will calculate how much they think the car will be worth at the end of the agreement. This will be based on a number of different factors, including Depreciation, how cars of that model retain value, and the estimated number of miles the car has on the clock.
Across the length of your finance agreement, you will be paying off the difference between the car’s start value and its GMFV, in effect paying for the car’s loss of value across the duration of the agreement. The reason why is because of the three different options you have when you reach the end of your loan:
So on a PCP deal you are borrowing the loss of value of the car across the agreement, effectively renting the car across the length of the deal.
So let’s say for example, you have purchased a new car for £25,000 on a PCP finance agreement across four years. The lender calculates that the cost of the vehicle in four years’ time will be £19,000 – this is the GMFV.
You will be paying off the £5,000 difference between the start value and GMFV, plus any interest the lender charges during this agreement.
Once you reach the end of the four-year term, you can then pay a one-off balloon payment of £19,000 to take full ownership of the car.
In most cases, at the end of the finance agreement the GMFV set by the lender will often be lower than the actual value of the vehicle. This works massively in your favour should you choose to upgrade your car through a part exchange, because the lender cannot ask for more than the agreed minimum future value. Therefore, you use the additional value of the vehicle as a deposit towards your next car.
The way you can make the car you finance worth more at the end of the agreement is by tackling the two key factors that go into a PCP package: depreciation and vehicle condition.
It’s no secret that new cars lose value dramatically almost from the moment they are driven off the forecourt. This can leave you out of pocket if you were to buy the car yourself outright and wish to sell it in a few years’ time. In a PCP deal, this element of risk is shared with the lender.
The secret is to look for a make and model that holds its value well. There are many websites online that detail which cars hold their value well. And while the lender will take this into account, you can still end up having a vehicle worth more than you were charged across the finance agreement. So if you buy the car and decide to sell or re-finance with the vehicle, you can end up with a much more valuable asset than with a car that suffers a higher rate of depreciation.
Many PCP type deals come with a number of rules and limits on how you can use your car. There tend to be annual mileage limits in place that, if exceeded, can end in you paying a penalty for each mile over the set amount. The same can be said of the car’s condition, with cosmetic damage enough to lower the car’s value and cause you an issue.
But if you are a careful driver, you can end up having a vehicle with more value than the GMFV that was set. Driving below the mileage limits will mean less wear and tear on the engine, and less of an affect on the car’s value. Having the vehicle serviced regularly and being careful to avoid dents, dinks or scratches, you can end up beating the GMFV when it comes to sell your car.
Of course, if you are planning to return the car to the lender, then there is no need to be too concerned about depreciation or condition at the end of the agreement, provided you stick to the rules put in place by the owner. The car isn’t owned by you after all, it’s owned by the lender until the full price has been paid.