Buying a new or used car and applying for vehicle finance can be an intimidating experience, especially if you are a first-time car buyer and not versed in the technical terminology used for the deal you want to sign. Guaranteed Future Value and Balloon Payments are popular finance terms you will come across when you are looking to buy a car. It is therefore vital to know these deals to see which suits your lifestyle and budget.
These two finance deals each have different strengths and weaknesses as they try to lower your monthly payment. Therefore, it is essential to be clued up on each deal, so you are not caught off guard at the end.
What is a Balloon Payment?
According to WesBank, a balloon payment is an amount that needs to be paid as a lump sum at the end of a vehicle finance contract that allows you to take ownership of the car. It is like a deposit, but the payment is made at the end of the finance term. It works well with financially responsible buyers who can save during the vehicle finance period to pay the balloon payment at the end of the contract. You can also sell the car you bought with the loan and use the money from the sale to pay off the balance, or you can refinance by taking out another loan that will finance the balloon payment at the end.
Advantages of Balloon Payments
- It reduces your monthly payment, making it lower than the traditional loan.
- It leaves you with more disposable income to use on other expenses.
- A deposit is not usually required, giving you the advantage of getting the vehicle sooner than waiting to save up for a deposit first.
- It allows you to afford a more expensive car that you wouldn’t be able to pay with a traditional loan.
What is a Guaranteed Future Value (GFV)?
Guaranteed Future Value is the guarantee of your car's worth at the end of your finance term, regardless of its actual depreciation (usually between three and four years). At the end of the contract period, the customer has three options:
- Exchange it for a new model and drive away in a new car
- Pay the outstanding amount and own the vehicle.
- Return the vehicle to the dealer and walk away
With a Guaranteed Future Value (GFV) finance deal, drivers cannot exceed a pre-agreed total mileage, and the vehicle should be in an acceptable condition according to the terms of the agreement. It is, therefore, vital to read and understand the contract. Car buyers usually buy a car every three to four years, and if you are one of them, this finance deal is excellent for you.
Advantages of Guaranteed Future Value (GFV)
- It is cost-effective! It reduces your monthly repayments lower than what most other customers are being charged.
- You get to drive a new car every three to four years.
- Your vehicle will always be under warranty and service plan, so if something breaks, it will be fixed by the manufacturer.
So, which one should you choose? This will depend on your budget and if you are confident of your finances increasing in the future. It is therefore essential to do much research to see which financial deal is suitable for you. Take time to talk to your dealer and banker to ensure you are all clued up, so you are not caught off guard at the end.
Article credit : Times Live
