Unfortunately, motorcycle finance is littered with acronyms. There are so many it would be easy to become a bit blasé but if you’re looking at PCP finance, there’s one you should never ignore: GFV or GMFV which stands for Guaranteed (Minimum) Future Value.
If we take a quick step back and compare Hire Purchase with Personal Contract Purchase. With HP, you set a monthly payment and payment term and when you finish this agreement you’ll have paid off the bike and the bike becomes yours.
With PCP, you are essentially paying for difference between the purchase price and the value of the bike at the end of the loan; the depreciation.
That’s why a PCP loan always appears cheaper than HP as you’re not paying back the entire amount by the end of the term.
Let’s say you buy a £10,000 motorcycle with no deposit (i.e. you’re being loaned the entire £10,000) and your term is three years. The GFV is set at £6,000, which is the amount the dealer (manufacturer or finance company) expect the bike to be worth after your 36-month agreement.
With PCP you’re not paying off the total value. You’re paying off the difference between the purchase price and the GFV and then you’re also paying interest on the entire purchase price; the loan.
At the end of your term you have two options: give the bike back and walk away or pay the GFV amount (often referred to as a balloon payment) and the bike becomes yours.
At the end of your term you hand the keys back and walk away. Or you pay the balloon (GFV) and the bike is yours.
There are a handful of variables that go into calculating GMFV. They are along the lines of: The manufacturer’s overall desirability, the type of motorbike or scooter you’re financing, the mileage you’re covering and the length of the PCP agreement.
For a finance company, this is where they earn their money. It pays for them to do their research and they have access to lots of industry data that will give them a very good idea of what a bike is likely to be worth at the end of its term.
Are you going for a 4-year not a 2-year PCP package? In that case, your GMFV will be lower on the same bike as the bike will be two years older at the end of the 4-year term and the thinking goes that it’ll be less desirable and therefore worth less.
Most PCP deals will have strict mileage limits in place, often around 5,000 miles a year so that if you decide not to purchase the bike at the end of your contract, the finance company aren’t stuck with a 40,000-mile three-year old Panigale. You can go over your mileage agreement but it’ll come with a pence-per-mile clause which can be up to 10p per mile. Ouch!
You can always try but most of the time, the dealer will hold up their hands and say “Sorry mate, the finance company set this rate, I can’t change it.”
If the offer is a manufacturer-backed offer with a deposit contribution, low initial deposit and an advertised monthly payment it’s all calculated from the GMFV and it’s highly unlikely you’ll be able to strike a deal.
Dealers, manufacturers and finance companies (also known as They) know that with PCP, you’re getting your hands on a new bike for less initial outlay than you would with any other finance agreement and so you’re less likely to negotiate.
If you are able to choose between a higher or lower GFV then it’ll probably be a pre-determined offer that’s slid across the dealer’s desk towards you. So why not set the GFV to be really high, then you’ll pay next to nothing for three years and walk away?
You won’t get to choose from two extremes at the opposite ends of the scale – the two GFV values will be within a few hundred pounds of each other.
A higher GFV might reduce your monthly payments but it’ll mean you have a larger balloon to pay at the end of your term. A lower GFV is a risk you can take if you think the bike is going to be worth more at the end of the term – then you’ll have more ‘equity’ to roll over to use as a deposit on a new bike. The two offers will most likely have a different APR attached to them and therefore the Total Amount Payable (TAP) will be different too.
A GFV is a calculation – a prediction – which even the experts get wrong. But they do so rarely. Most finance companies will calculate the GFV to be on a conservative side. Why? For these reasons:
The bittersweet thing about ‘equity’ is that it means you’ve been paying interest on money that you didn’t need to borrow. If you don’t want to buy the bike at the end of the term, you better hope the dealer overestimates the GMFV – that way you’ll have had a better deal.
There’s one elephant in the room with a guaranteed future value and that’s the bike’s condition. Some manufacturers will list the penalties for parts of the bike they feel they need to replace. The bad news is, the dealer is almost always the judge, jury and executioner. They will usually be fair but the slight scuffs on the tank and small chips in the wheels can soon add up and dent any equity you were hoping to carry over to your next bike.
Don’t get hooked in by the low monthly figure in 3-foot writing stuck on the dealer’s main window – it’s there to get you in. Concentrate on the Total Amount Payable (TAP) and compare that to the cash price. Shop around – it could be that a loan will work out cheaper. Remember: you should never take out a finance agreement if you don’t think you have the means to pay or plan not to pay. However once you have paid 50% of the TAP, you can use the Voluntary Termination clause to finish the agreement but you’ll have to give back your motorcycle or scooter.
If you’re not that bothered about getting a deal, then jump on the first PCP ‘deal’ you see. But don’t say we didn’t warn you.