The Truth about Car Finance with Guaranteed Future Values – If you have Consumer Car Finance you need to know this

When buying a car you may find you are offered a finance package that includes a Guaranteed Future Value (GFV) at the end of the finance period. Sometime these facility may be called Personal Contract Purchase (PCP) or Triple Choice. Fundamentally they are all the same facility and are simply hire purchase agreements with a large final “balloon” payment.

The main benefit to having a large final payment is that the monthly repayments are lower throughout the term, although the total interest charged over the life of the agreement will be higher.

My main beef with the Guaranteed Future Value is in the way its presented and sold as though its some fantastic benefit provided to you, when in reality you have legal rights in place anyway. As knowledge is power allow me to enlighten you.

The GFV sounds like a great idea. You finance the car for, say, 3 years then you have three choices:

1. If the car is worth less than the Guaranteed Future Value you can hand it back with nothing more to pay.
2. If the car is worth more than the GFV then you can sell it, and pocket the difference
3. If you want to keep the car you could refinance the GFV over an extended period

What a fantastic offer, how can you possibly lose!! And how helpful of the dealer to take away all the risks, why would you need to look anywhere else for your finance?
That was sarcasm by the way....!

You see what they don’t tell you, and you almost certainly don’t know is a little something called THE HALVES AND THIRDS RULE, more properly referred to as your Termination and Repossession Rights as they apply to agreements regulated by the Consumer Credit Act.

The most important one of these is the Termination Clause, which appears on every Consumer Credit Act regulated hire purchase or conditional sale agreement, whoever the finance provider is. It reads:
 
"You have a right to end this Agreement. To do so, you should write to the person you make your payments to. They will be entitled to the return of the Goods and to half the total amounts payable under this Agreement. If you have already paid at least this amount plus any overdue installment and have taken reasonable care of the Goods, you will not have to pay any more.”

What does this mean?

In simple terms it means the Guaranteed Future Value “benefit” that people are sold, is marketing spin, as you have termination rights legally built into the contract – whoever the finance company is the legal rights will still apply. 

Lets assume we come to the end of our 3 year agreement and find that our vehicle is worth £14K and our Guaranteed Future Value is £15K. In that situation we’d most likely hand the vehicle back as we are £1K down, and, if we didn’t know better be grateful to the dealer for protecting us against the negative equity shortfall.

In reality as long as we had already paid “half the total amounts payable” which we would have done by this point, we are legally entitled to hand the car back with nothing more to pay. The dealer isn’t doing us a favour, its the law!

When we know this it means we understand that this benefit we are buying is actually our legal right. We are free to shop around and compare other facilities that do the same thing, may have a different name, but could be substantially cheaper.

A few points to bear in mind:

1. This applies only to agreements regulated by the Consumer Credit Act, and since 2007 this is no longer just up to £25K, it means any agreements for private individuals, sole traders or partnership businesses where they haven’t been able to opt out of the CCA regulations by virtue of qualifying as a High Net Worth individual or an exception based on the vehicle being used for more than 66% of its miles for business travel. Unless you have specifically asked for this you wont be in this category. Even £100K vehicles would still be treated the same way.
2. Finance taken in any limited company name does not get the CCA protection
3. The total amounts payable is calculated by multiplying the monthly finance payment by the number of months, plus any deposit paid, plus any lump sum, balloon or Guaranteed Future Value, plus any document fees. This figure is “The Total Amounts Payable” and diving by 2 gives us, surprise, surprise, half the total amounts payable. When you have repaid this amount you can terminate the agreement at any time along the terms set out above.

Lets take a real example:

A car costs £30,000, the customer puts down £3K deposit, and the finance payments are 36 x £535 with a balloon of £12K. Now sold as a Guaranteed Future Value deal, or PCP deal, the agreement runs full term and the vehicle is handed back when the balloon or GFV falls due at month 36.

However lets look at what the total amounts payable are:

36 x £535 = £19,260, plus £3K deposit, plus £12K balloon, so total amounts payable = £34260

Half the total total amount payable is £34260 divide by 2 = £17,130.
 
So when we have paid £17,130 we can terminate the agreement. When would this be?
 
From the £17130 we deduct the deposit that we pay up front, so minus £3K = £14130.
 
Divide £14130 by the amount of the monthly payment i.e £535 = 26.41 months
 
This means when we pay the 27th monthly payment we could AT THAT TIME hand the vehicle back with nothing more to pay.... 9 whole months before we would have the same right under the GFV/PCP apparently brilliant deal.  
 
Now, you might not want to do this, many want to keep the cars and pay off the balloon. You can still do this with a simple HP with balloon deal BUT, the fact that you know you could walk away provides you with lots more options and could potentially save you lots of money.
 
So, when you are next looking to finance a car and you have an offer from the dealer available which contains a Guaranteed Future Value, smile in the knowledge that you know this is marketing puff, and why not contact us on 0845 3300 455 to see if we can drive a better deal and give you the inside info that could save you thousands.