So, you’ve found your dream car and the dealer offers you a way to guarantee the future value of your car. On paper, it sounds like a great idea. I mean, who doesn’t want to slow the process of depreciation? But, before you sign the dotted line to opt into Guaranteed Future Value, make sure you are aware of what it entails.
Understanding Guaranteed Future Value (GFV)
You can find loads of resources detailing what Guaranteed Future Value is, but essentially, it is a sales tactic that tries to manage your fear of depreciation when buying a new car, especially when your finance contract has a balloon payment (i.e. a large final repayment at the end of the finance contract).
When a Guaranteed Future Value contract is made, the dealer will offer a minimum trade-in value, provided that certain conditions are met. These may include:
- Maximum kilometres on the vehicle
- Wear and tear
- Residual amount owing on the loan
How does it work?
Guaranteed Value Financing is an alternative to traditional purchase financing or leasing. You can use this option to take advantage of a lower monthly payment.
You purchase the vehicle and finance it using a Guaranteed Value Financing contract. The term of your finance contract is 60 months (5 years) but it is amortized over 84 months (7 years). This allows you to have a lower monthly payment. Your payment schedule is structured using a consecutive monthly payment for the 60 months (5 years) and a balloon payment at the end of your contract (which is the amount remaining on the loan). At the end of the contract term, you have 3 options for paying the balloon payment.
- Refinance the outstanding balance
- Purchase the vehicle by paying the outstanding balance
- Trade the vehicle in towards the lease or purchase of a new vehicle
Who is this really benefiting?
Mainly, Guaranteed Future Value puts the dealership in the driver seat [pun intended]. When you are getting ready to sell your car, it “forces” you back to the dealership to get best resale price, giving you less choice. If you choose not to trade-in, you will be stuck with a significant balance left to pay out your loan.
What do you really need to know?
Like any important decisions in your life, take the time to review all your options before you sign up for Guaranteed Future Value. This may include being aware of the following:
- It will shrink your market when you are ready to sell this car.
- If you are on balloon finance and opt to sell it through another dealership, you might end up needing additional funds to assist with negative equity, due to the size of your balloon payment being more than the market value of your car at the time.
- Often you are tied to using the dealership’s workshop for ongoing maintenance of the car.
- Usually Guaranteed Future Value will come with an expiry date (sunset clause). This means the offer is only valid until a certain date, forcing you to upgrade earlier.
To understand depreciation of cars over time, a good independent resource is Red Book. This can help you negotiate realistic balloon payments on your finance.
This is where having an experienced finance broker can help you access a variety of tailored finance options. So, if you are in the market for a new set of wheels, or upgrading your current ones, contact our team at cash.com.au today. Our application process is 100% online and comes FREE of any obligations.