New-car financing option picks up speed in SA
Factor in depreciation and avoid the dangers of a balloon payment greater than the value of your vehicle
Vehicle financing that caters for the depreciation of your car is gaining popularity as consumers seek more affordable monthly repayments that avoid a balloon payment that could exceed the value of the car at the end of the contract.
The newest type of finance is Guaranteed Future Value, also known as GFV or any number of brand-specific titles, which is becoming an increasingly popular form of vehicle finance in SA, says Wesbank executive head of motor Ghana Msibi.
He says a vehicle begins depreciating (losing monetary value) the moment it leaves the showroom floor. In line with this depreciation, a GFV plan calculates the future monetary value of a vehicle considering certain criteria such as vehicle condition, mileage and maintenance are met. This future value is guaranteed at the start of the agreement.
Alex Parker, manager of business communications at BMW Group, says unlike traditional vehicle financing, with GFV-based products you do not carry the risk of depreciation-related losses at the end of the finance term, because you can return the vehicle to the dealer.
He says GFV has become very popular not only due to the product’s flexibility and risk-free nature, but also because it offers you the opportunity to easily and seamlessly trade into a newer vehicle.
Thato Mntambo, corporate affairs manager at Mercedes-Benz SA, which claims to be the first to have introduced GFV in SA, says there has been a good uptake of this type of finance.
Msibi says the temptation of a new car can sometimes lure a buyer into a commitment that isn’t an ideal fit for their budget. “Fortunately, there are flexible finance options for buyers to choose from.”
He says there are essentially three types of finance plans: installment finance, installment finance with a balloon payment and a GVF agreement.
Installment finance is the most straightforward of all vehicle finance options. Monthly repayments are calculated on the purchase price of a vehicle minus whatever deposit is put down at the start. Finance terms can be structured between 12 and 72 months.
The longer the term, the lower the monthly repayment will be, he says, but be aware that interest will add up over longer terms and the total amount repaid to the bank will increase proportionally.
The second type is installment finance with a balloon payment. This is like installment finance, except a portion of the purchase price is set aside as a final balloon payment, so that the repayments are calculated on a lower amount.
Simply put, a balloon payment is similar to a deposit except it’s payable at the end of a term instead of the beginning, he says.
But as a buyer you must be careful of the amount you choose as a balloon because you will be responsible for the lump sum at the end of the term. While it may be attractive to have lower monthly repayments because a larger chunk of the purchase price is placed into a balloon, the repayment of a balloon can be an unexpected debt as this amount will either need to be settled or refinanced at the end of the deal.
Parker says with GFV you agree on a mileage limit for the term of your contract, which determines a guaranteed future value for the vehicle at the end of the agreement, which can be optionally settled as a final payment for you to take full ownership of the car.
At the end of the GFV agreement, you have three options: you can take ownership of your vehicle by settling or refinancing the GFV; return the vehicle to the dealer and walk away; or hand the vehicle back and buy a new one with a new GFV contract.
Msibi says the flexible options you have at the end of the contract makes planning ahead easier as you know exactly what your car will be worth once the predetermined contract term (usually between three and four years) is reached.
According to Mntambo, Mercedes-Benz SA guarantees the future value of your vehicle as long as you adhere to the terms and conditions of a fair wear-and-tear contract.
You can choose a repayment term of between 12 and 60 months or a mileage option to suit your driving requirements from 10,000km to 45,000km a year with an adjusted GFV for each mileage and term option.
Msibi adds that with a GFV plan, you are only paying for the use of the car. This is why it’s important to know more or less the distance you will cover in your vehicle over the term. You will be liable for penalties if any conditions of the GFV agreement aren’t met.
Jaguar Land Rover introduced a Guaranteed Future Value finance product in the middle of 2018 and this contract is also available through Audi Financial Services.