Guaranteed Future Value Explained

Guaranteed Future Value (GFV) is a term used to describe the cost on which a balloon payment is based on for a Personal Contract Purchase or Lease Purchase agreement. Below, we explain what Guaranteed Future Value is in more detail and how it may affect your car finance policy.

Creditplus Definition of Guaranteed Future Value

Guaranteed Future Value is a figure on which a balloon payment in a PCP or LP agreement is based. GFV is calculated based on the predicted residual value of a vehicle, which in turn is calculated according to information from trade guides and takes factors such as depreciationmileage and condition into account.

After being agreed at the start of the contract, the GFV will not change, meaning the balloon payment you were quoted at the beginning of the contract will not change. This is regardless of current market value of the car at the end of the contract.

In order to protect the GFV, most lenders will set a mileage limit on a PCP contract. The mileage limit will be agreed at the start of the contract, and will affect the GFV figure. This is because mileage can have a significant affect on the value of a used car – the higher the mileage, the less a car is worth. By imposing a mileage limit, the GFV is protected. If you go over the mileage limit there is a fee payable, usually calculated as a few pence per mile over the limit.

This is most important if you decide to return the car to the lending company at the end of the contract, as they will want to ensure that the value of the car is as close to the GFV as possible.

When you take out a PCP contract, it's important to take the Guaranteed Future Value into account, as this figure will be the amount that you will have to make as a balloon payment at the end of a contract if you wish to take ownership of the vehicle. Because it's based on the residual value, it will also have a role in determining what your monthly repayments will be. This is because they are calculated based on the difference between the cost of the vehicle at the start of the agreement and the Guaranteed Future Value or residual value.

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