A vehicle’s GFV is calculated by the lender at the start of your contract and does not change, regardless of market changes that might impact the value of your car.
GFV is based on the anticipated Depreciation of your vehicle over your contract length taking into consideration your expected annual mileage.
The GFV does not change, even if your vehicle depreciates at a higher rate than expected.
If you want to keep the vehicle at the end of your PCP agreement, you’ll need to pay the optional final payment equal to GFV, often referred to as a Balloon Payment.
However, if you decide to Part Exchange the vehicle, any positive equity can be used as a deposit towards your next car finance deal.
Mileage is a significant factor in determining the GFV of the vehicle.
That’s why it’s important to agree accurate Annual Mileage with the lender at the start of the agreement. If you exceed your mileage you will be charged excess mileage at the end of your contract.
Whilst the excess mileage charge may only be a few pence per mile, it can really add up.
Likewise, if you hand the vehicle back with damage that impacts the value of the car, the lender will normally charge you with the cost of repair.
GFV helps the lender calculate your monthly repayments over the length of car finance agreement.
The amount you pay is based on the total cost of the vehicle at the start of the agreement, compared with the expected future value at the end, with finance interest added on.
The steeper the depreciation curve, the bigger the difference in value resulting in higher monthly repayments.
Depreciation on new cars is usually faster than the depreciation of a used car.
This means, with a new car the difference between the purchase cost and future value is much higher resulting in higher monthly payments.
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