What is Guaranteed Future Value (GFV) and how does it work?
A common incentive offered by car manufacturers is to guarantee the future value of a car. It seems like a good idea, so what does it all mean?
GFV, as it is commonly known, is a sales tactic that attempts to leverage your fear of your new car falling short in value of the balloon payment (i.e. a large final repayment at the end of the finance contract) – otherwise known as negative equity.
This scheme puts the dealer in a position to ‘control the second market’ by contractually squeezing you to come back to them for your next purchase, effectively giving you less freedom and choice under the guise of brand loyalty without question.
If you are considering this type of contract, take time to review all your options and consider the following important points when making your decision:
You will have less choice next time you want to trade this car as you must return to the same dealer.
Where you elect to go to another dealer or make, and your balloon payment is above the ‘market value’, you will be in a negative equity position and may need to refinance the outstanding debt. This can be mitigated from the outset by not overpaying for the acquisition in the first instant.
Dealers will ultimately recover any shortfall between the GFV and cost of repairs (to bring up to acceptance level) by the quantum of margin in a near full retail price point on your next vehicle purchase, accessories, dealer delivery and finance etc.
Generally, all maintenance is to be completed by that dealership’s workshop as a condition of the contract, often at a materially higher cost than equally skilled competitors.
There will be ‘return conditions’ on the contract such as capping of allowable kilometres travelled, onerous and unrealistic fair wear and tear limits on the vehicle. Failure to comply will incur draconian discounts on the supposedly ‘Guaranteed’ (future) value.
A ‘sunset clause’ is commonly found in these types of contacts – a date the guarantee must be exercised or it will lapse – this may invisibly strong arm you to consider upgrading your vehicle earlier than you would reasonably need to – if you ask me, this all sounds like a bear trap.