It sounds like a great deal. You’re being given the chance to buy a new car with monthly repayments that are almost half what most other customers are being charged. And the cherry on top: at the end of four years you’ll be able to exchange it for a new model.
This is what’s known in the trade as guaranteed future value (GFV) financing and it’s becoming increasingly popular with motorists as it offers them a more affordable way to ensure they drive a new car every few years. But before you get yourself locked into one of these contracts, make sure you read the fine print.
A new vehicle starts losing value as soon as you drive it off the showroom floor. What makes GFV financing so appealing is that it’s calculated according to the future cash value of a vehicle – in other words how much the car is going to be worth in three or four years’ time. Your monthly repayments are then calculated according to that lower value. For example, the GFV repayments on a car that costs R600 000 can be about R6 500 a month over a four- year period. On a traditional finance plan, the same car’s monthly repayments would be around R11 000 a month over six years.
Applying for this is fairly easy, as are the documents required. Car dealerships will require a three months’ salary slips and bank statements, your ID, proof or residential address and a valid drivers’ licence.
Although the GFV option sounds much more cost effective, you’ll have to comply with several conditions while the car is in your possession, and you’ll have to return the car to the dealership at the end of the contract period. So even though by that point you would’ve forked out R312 000, you won’t actually own the vehicle. It’s more like a type of car hire.
These conditions usually include a set contract period, generally 36 or 48 months. Maintenance conditions, such as having the car serviced every year or after a certain number of kilometres at approved service providers. A set maximum number of kilometres you may drive. This depends on the dealership, time period of the contract and type of vehicle, but could be anything between, for example, 10 000 and 30 000km. And lastly, that you return the vehicle in a good condition, undamaged – excluding normal wear and tear.
Your contract must stipulate all these conditions, as well as at what state you must return the car in if you want to trade it in for a newer model.
Read more: How much can you afford to spend on a car?
So, what happens if you do not comply with these conditions?
If you drive more than the maximum allowed mileage, you’ll have to pay a penalty – for example R3 for every kilometre you drove over the stipulated maximum. This amount will be stipulated in the contract. If you’ve damaged the car beyond normal wear and tear – say you’ve torn the seat covers or there are a few scratches on the paintwork – you’ll probably have to pay to get them fixed. It’s important to comply with all the contract’s conditions. The financier doesn’t really make a profit from this type of vehicle financing and therefore is counting on being able to benefit when the car is sold. That’s why the contract term and mileage are limited.
When the contract expires, you’re going to be left with three options. You could trade in, buy, or return the car to the dealership. If you trade in the vehicle, you can choose GFV or another type of financing to buy a new car. If you choose to keep the car, you’ll have to pay for it in full or refinance it. The refinancing will usually be a traditional repayment plan. Or you can simply return the car without any further expenditure if you’ve complied with all the contract conditions.
Every deal comes with its own pros and cons, you’ll have to decide what outweighs the other. For GFV however, the benefits are that the monthly repayments will be less than on a traditional or a balloon repayment plan. And the dealership will simply take back the vehicle at the end of the contract period and you won’t have to worry about selling it. On the other end, your mileage is limited, and you’ll be charged a penalty if you drive more than the contract allows or if you terminate the contract early. You will also have to pay to fix any damages beyond everyday wear and tear.
If you can pay cash for your next car, that’s great, but if you need financing, consider the above before you fall in love with a car on the showroom floor. If you still need more information, most banks have finance plan calculators on their websites.