Guaranteed buy back is all up front

A new car suffers the biggest dent to its re-sale value early on, and it's hard to predict what that re-sale hit is going to be. However some manufacturers offer buy-back schemes that provide resale certainty when it comes time to offload your car.

These guaranteed future value (GFV) programmes, currently offered by eleven car makers in Australia, are tied to finance deals offered through the manufacturers or distributors.

Two manufacturers with GFV programmes are not included here: Lexus and Toyota. Given the ease with which we were able to obtain the relevant GFV information from the nine other brands here, we were surprised by the Lexus/Toyota response.

Toyota's national marketing and public relations manager, Mike Breen, told motoring.com.au: "Toyota Financial Services... don't disclose this information. Customers should refer to their dealers."

At first glance, GFV looks like an ideal way of locking in the future value of your car, but the catch is that these deals do not apply if you buy a car with cash or non-manufacturer-sourced finance. It has to be as part of a finance arrangement with the dealer, and one that features a residual/balloon payment. That final payment is the car's GFV.

The beauty of GFV is that it removes the greatest risk of taking out finance with a final lump-sum payment (or balloon payment). That risk is that at the end of the finance term the vehicle is worth less than the final payout figure, perhaps substantially less. With the GFV loan, you know exactly what you're up for at the end of the contract as you're walking into the deal. If, for any reason, your car's resale value drops more than expected during the loan period (for reasons that you have not caused), the manufacturer wears the risk, not you.

The other advantage is that if your vehicle is worth more than the GFV at the end of the loan period, then when it is appraised you'll pocket the difference if you hand in the vehicle, or you can use the cash to put towards a new car.

"There are many factors that will determine what a used car is worth, starting with how many there are for sale and the demand for people wanting to buy that model," says RedBook Data Services Director, Ross Booth.

"Then you throw into the mix, your colour, the exact kilometres, condition, where you are located and how quickly you want to sell; all these will determine the price. A Guaranteed Future Value offered by a Manufacturer finance company gives you certainty of what your car will be worth at a minimum. This is a minimum guarantee and if the car is worth more you could get more money back than the minimum.

"Remember that the Manufacturer wants you to buy another one of their cars, so you will have some consumer bargaining power at the end of their term."

We've included projected wholesale values from Redbook in our listing below, and while most are within $1000 of the GFV, the Audi Q5 will be substantially more according to Redbook and the Jaguar XE and Tesla Model S significantly less. Either way, it proves that this type of finance works. Your car won't be worth less than the GFV – even if its wholesale value turns out to be – and if it's worth more, you'll get a cash bonus to put towards your next car.

All GFV contracts provide three options at the end of the loan period: either you keep the car, hand it back or trade it in. Really the last two are the same; if you're trading in on a new car all you're doing is wiping the slate clean by handing in your existing car and starting afresh. If you simply wish to hand in your car, then that is your last obligation in the GFV contract.

Taking up the GFV option is increasingly popular, says Booth, for reasons that go beyond just the peace of mind at the end of the loan contract. It's also a means of enhancing your money's buying power at the onset and during the loan contract term.

"Using a GFV finance product will keep your monthly finance payments low, meaning you can drive a better quality of car than perhaps you could if you use a traditional 'non-balloon' finance method or if you pay cash."

But like an interest-only mortgage for a home, there is a pitfall with GFV, Booth notes.

"At the end of the day you are effectively 'leasing' the car and will have little equity after the term has been completed."

For Audi and BMW, the GFV offer is for business customers only. For the others, the offer is for both business and private buyers, although in truth this kind of finance is probably better suited to business buyers who can claim vehicle tax deductions.

GFV finance options appear quite flexible arrangements. For example, Mercedes-Benz offers from one to five-year GFV terms, and from 5000km allowance per year to 50,000km. BMW and MINI have four finance deals based on 10,000km, 15,000km, 20,000km or 25,000km, and you can nominate contract periods of two, three or four years.

Tesla allows 15,000km, 20,000km or 25,000km per year and a loan agreement period of three, four or five years. Tesla also nominates agreed value on a percentage basis; the scenario we've given below is at Tesla's 52 per cent guaranteed resale value. If you elect for the full five years and 25,000km per-year option, it drops to 41 per cent.

Most GFV deals are offered on the brand's whole range; in Hyundai's case it's limited to i30, Tucson, Sonata, Genesis and Santa Fe.

Most GFV deals incorporate options and accessories fitted at the time of sale.

Tesla allows 43 per cent of the original purchase price for options.

There are conditions to all of the GFV offerings. You can't finance a car under a GFV contract and expect to log huge distances and be careless with it during the tenure of the contract. Or rather you can, but you won't get your GFV. It will be eroded to a lesser value to account for the damage or excess kilometres travelled.

Speaking of damage, all manufacturers add the proviso that the GFV will be paid only if the vehicle sustains fair wear and tear. Interpretations of fair wear and tear vary, but all manufacturers are agreed that there can't be any big dents, badly damaged wheels, torn upholstery, cracked or broken lights or unroadworthy tyres or windscreen. Some are more generous here than others; Mercedes-Benz allows kerbed wheels but not bent ones, and uses what it calls the 'credit card' test — if panel or interior damage is smaller than the size of a credit card, it is usually deemed fair wear and tear.

"Things to watch with a GFV finance product include the kilometres you will travel, as many Finance Companies have excess kilometre charges, and you are 'agreeing' to how many kilometres you will drive in your car over the next 3 years," Booth explains.

"In addition, be mindful of the 'condition' that you need to return the car in. As with all finance products you need to shop around and ensure you are paying a competitive rate of interest compared with alternative finance methods.

"As with all car purchases you need to ensure the purchase price and the GFV is something that is competitive compared to other options. Can you get a discount on the purchase price of the GFV product like you would under a traditional finance or cash purchase? You should also check with all new car purchases the build date and Model Year of the car, making sure it is the current model not a superseded model."

Tempted to splash your car with painted advertising? Not that many people do these days, but the GFV contract bans any painted signage. You can only use stick-on or magnetic signage, and must remove it before the contract's up.

All GFV deals also stipulate that the vehicle has to be serviced according to the manufacturer's schedule (although not necessarily at the brand's dealers), and that keys, books and tools remain with the vehicle. Accessories and options sold with the vehicle must remain with the vehicle too.

Leading up to the contract's end date, you'll have to take your car in to one of the manufacturer's dealers to be appraised. Once it gets the all-clear for damage, kilometres and equipment, you're good to go with paying out the loan, trading in or returning the car.

The examples we've given below from each of the manufacturers are not direct comparisons as the brands are so diverse; each marque is represented by a popular model in their respective ranges.

Like any contract you sign, you'll have to look closely at the conditions and note that the figures below are indicative only. Both conditions and payments are subject to change and no doubt will.

<a href="http://www.audifinance.com.au/business/guaranteed-future-value.aspx" target="_blank">Audi Choice<br> </a>
Model: Q5 2.0 TFSI quattro tiptronic
Price $63,210
Distance 60,000km
GFV $31,905 (Redbook: $36,650)

<a href="http://www.bmw.com.au/en/topics/offers-and-services/bmw-financial-services/leasing.html" target="_blank">BMW Full Circle<br> </a>
Model: 330i sedan
Price $69,900
Distance 60,000km
GFV $34,602 (Redbook $34,250)

<a href="http://www.hyundai.com.au/owning/guaranteed-future-value" target="_blank">Hyundai GFV<br> </a>
Model: i30 1.8 Active auto
Price $23,290
Distance 60,000km
GFV $10,434 (Redbook $11,200)

<a href="http://www.jaguar.com.au/jaguar-range/xe/finance-and-insurance/guaranteed-future-value.html" target="_blank">Jaguar Freedom<br> </a>
Model: XE 20t Prestige
Price $60,400
Distance 60,000km

<a href="http://www.mercedes-benz.com.au/content/australia/mpc/mpc_australia__website/en/home_mpc/passengercars/home/financialservices/financing/agility.html" target="_blank">Mercedes-Benz Agility Programme<br> </a>
Model: C 250 Sedan
Price $68,900
Distance 45,000km
GFV $39,273 (Redbook $37,200 at 40,000km)

<a href="http://www.mini.com.au/flex/" target="_blank">MINI Flex<br> </a>
Model: Cooper Five-Door manual
Price $27,750.
Distance 45,000km
GFV $15,102 (Redbook $14,150 at 40,000km)

<a href="http://www.skodafinance.com.au/business/skoda-choice.aspx" target="_blank">Skoda Choice<br> </a>
Model: Octavia Ambition Plus 103TSI DSG sedan
Price $27,090
Distance 45,000km
GFV $11,350 (Redbook $12,000 at 40,000km)

<a href="https://my.teslamotors.com/en_AU/financing/faq" target="_blank">Tesla Resale Value Guarantee<br> </a>
Model: Model S 70
Price $128,893
Distance 60,000km
GFV $67,024 (Redbook $62,350)

<a href="http://volkswagenaustralia.com.au/VolkswagenChoice/Content/PDF/VolkswagenChoice_Customer_Brochure_040315[2].pdf" target="_blank">Volkswagen Choice<br> </a>

Model: Golf 92TSI Comfortline Hatchback DSG
Price $27,990
Distance 45,000km
GFV $13,423 (Redbook $14,850 at 40,000km)

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