The biggest mistake in automotive finance

How residual value can keep you in

Published: 01-10-2019

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When you walk into a dealership and sit down to work out finance it can often be a maze of terminology and numbers, all of which have been calculated and shown to you on the day and if you go in unprepared, you can end up paying a lot more for a car than you may realise.

There is one thing in particular that we’ll talk about today with a finance package and that is Residual Value.

Residual value

Residual Value or RV is the estimated price of the car at the end of the term. The next few examples are relevant with what is known as PCP finance, this is where you pay a deposit, monthly payments and then a final balloon payment at the end, this balloon payment is usually equal to the RV of the car. If you’d like to learn more, see our finance guide.

Example 1 - Higher value than expected

If the car is worth £30,000 now, the RV in 4 years time maybe say £10,000. This works out great if the RV is on target and in four years time the car is actually worth £10,000. But what if the RV is wrong? Checkout the following example:

Predicted RV: £10,000 Actual Value: £12,000

You sell the car, you gain £2,000; great! But if you care about lowering the monthly payments, you’ve just missed out on £2,000 over four years. But now for the scarier version.

Example 2 - Lower value than expected

Predicted RV: £10,000 Actual Value: £8,000

In this scenario, the car is worth less than what the finance company or dealership has predicted. This is amazing for your lower monthly payments but when it comes to selling the car, you can only sell it for £8,000 even though the finance company was expecting a balloon payment of £10,000 and so you’re £2,000 short.

Both examples commonly occur in the finance industry, the second example is typical with manufacturer finance packages. This is because at the end of the term, the manufacturer can turn around and say “The car is worth less, but we’ll let you off if you purchase another car through us” - in that way the manufacturer lock you into their cars.

So how do you protect yourself from these scenarios? If you want to minimise your monthly payments but ensure that you won’t be out of pocket when the finance term comes to and end then you need to accurately predict residual value so when the time comes to sell the car, you know exactly how much you’re after. At Brego, we use artificial intelligence to accurately predict depreciation. This allows you to view residual value of your next car for the next 5 years. Contact us to help you with your next financial agreement, make sure you don’t get caught out and that you go in armed with the correct knowledge to get the perfect financial agreement.

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