How does guaranteed future value leasing work?

As the old saying goes -your brand spanking new vehicle depreciates in value from the second that you drive it out of the showroom. Many of us opt for a lease for a new vehicle – this is a tax-efficient way to finance a vehicle without tying up capital. However, the market value of your vehicle at the end of the lease contract is a matter for speculation, with variables including the condition of the vehicle and the state of the market at the time.

With normal car lease programs, you pay an amount each month depending on how far you travel. At the end of the lease period, you can switch for a new vehicle or pay a lump sum or balloon payment. Sometimes the balloon payment is less than the car is worth, and you can sell the vehicle for a profit. However, sometimes the car has depreciated to the extent that the balloon payment is larger than the value of the car – mostly an unexpected and financially awkward situation.

With a guaranteed future value lease contract, when the contract ends, you have three options – you can keep the car, return the vehicle or trade it in for another vehicle. If you return the vehicle, all payment obligations cease. If you trade the vehicle in, and the actual trade-in value is higher than the guaranteed final value, then you will receive the difference. If you keep the car, you will pay the final figure as agreed at the beginning of the contract.

There are obviously terms and conditions that will apply to these deals, and these will vary from manufacturer to manufacturer. The bottom line is that this type of deal is only available for finance deals supplied by the manufacturer. Expect there to be limitations on distance travelled over the period of the lease, and the vehicle must usually be serviced within the manufacturer’s network.

Each manufacturer will have different guidelines for what is deemed to be normal “wear and tear” – make sure that you are clear on these, and also remember that “wear and tear” applies to paint, wheels, underbody, windows and interior. If the condition of your vehicle falls short at the end of the contract period, the guaranteed value will be adjusted accordingly.

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Carbiz