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GMFV is the Guaranteed Minimum Future Value of a vehicle financed using PCP Finance.
It is a known fact that PCP finance offers very low monthly installments, especially when compared to hire purchase (HP) method. A key factor behind this is that during the loan period, you are not paying off the car's total value as your monthly payment. Instead, you are only paying for the difference between the car's original purchase price and its expected price at the end of the loan term. This expected price of the car is GMFV or final payment or balloon payment.
At the beginning of the PCP term, the car loan provider will offer you a GMFV or minimum value of the car. This is expected to be the car's value at the end of the loan term. When the term ends, you can pay this amount and get ownership of the car. Alternatively, you can get this amount back as cash or use it as a deposit for the next car.
Suppose you want to buy a Vauxhall Corsa Hatchback under PCP. The car price is £9,596. You want a car loan term of 36 months. The dealer may offer you a GMFV of £3,975 at the end of 36 months. When your loan term ends, you have two options. You can pay £3,975 to the dealer and get ownership of the car. Alternatively, you can return the car and receive any outstanding balance. An outstanding balance in your favour occurs when the actual value of the car exceeds the GMFV, so if the value of the car was £4,200, you would receive £225 which you could then put towards the cost of a new car.
GMFV is calculated based on the car type, car loan term, and expected annual mileage. Going with the above example, the dealer may have offered you a GMFV of £3,975 subject to certain conditions such as mileage restrictions of 10,000 miles, term of the loan as 36 months, etc. If you are expected to drive a lesser mileage at say, 8,000 miles, your GMFV may become higher. Similarly, if your loan term is 48 months, this GMFV become lower as the car's value will reduce further over time. You should note that the finance company will be very conservative in their estimate of GMFV as they would not like to make a loss at the end of the term.
GMFV or final payment is a key factor when it comes to choosing from different PCP deals. GMFV plays a key role in determining the total to be repaid, total amount borrowed, and the monthly PCP payments. A higher GMFV can reduce your monthly liabilities. However, the higher GMFV would mean that you may have to pay a relatively higher amount if you want to buy the car in the end.
While you should always look at a higher GMFV, you also need to check the other factors around the deal. It may be the case that the GMFV is higher in deal, yet the car price, APR, and other factors may increase the total amount repayable, and thus result in a loss for you.