The Trick to GFV Loans: How the “Total Payment” Can Be More Expensive
At first glance, it seems that the interest on a GFV loan is calculated on the full vehicle price, just like a regular loan. However, this is where the hidden reason for the higher total cost of a GFV loan lies.
The Fundamental Difference in How Interest Is Calculated
With a conventional loan, the loan principal decreases with each payment, but with a GFV loan, a portion of the principal remains untouched throughout the contract.
1. With a Conventional Loan
- Interest Calculation: Interest is calculated monthly on the remaining loan principal.
- How the Principal Decreases: Each monthly payment includes a portion for both the principal and the interest. The amount of money you owe (the principal) gradually decreases with every payment.
- Total Interest: Since the principal is constantly shrinking, the amount that interest is charged on also decreases, resulting in a lower total amount of interest paid.
2. With a GFV Loan
- Interest Calculation: Interest is calculated on the full vehicle price, which includes the GFV.
- How the Principal Decreases:
- Monthly Payments: Your monthly payments cover the portion of the vehicle price excluding the GFV.
- The GFV: The GFV portion is held as a fixed loan principal for the entire contract term.
- Total Interest: Because the GFV portion remains untouched as a loan principal, interest continues to be charged on this amount throughout the entire contract.
This key difference—that interest continues to be charged on the GFV portion of the loan for the entire term—is what makes it fundamentally different from a conventional loan.
A Concrete Example for Comparison
Let’s compare a conventional loan and a GFV loan on a ¥3,000,000 vehicle with a 5% interest rate over 5 years.
Conventional Loan
- Loan Principal: ¥3,000,000
- The principal gradually decreases with each monthly payment.
- Interest is calculated on the decreasing principal, keeping the total interest low.
GFV Loan
- Vehicle Price: ¥3,000,000
- Guaranteed Future Value (GFV): ¥1,500,000 (assuming 50%)
- Loan Principal for Monthly Payments: ¥1,500,000
- GFV Held as Principal: ¥1,500,000
While your monthly payments only cover the ¥1,500,000 portion, interest is charged on the full ¥3,000,000. This means that interest continues to accrue on the remaining ¥1,500,000 (the GFV) for the entire 5 years.
| Item | Conventional Loan | GFV Loan |
| Loan Principal | ¥3,000,000 | ¥3,000,000 |
| Final Payment (GFV) | None | ¥1,500,000 |
| Monthly Payment (Approx.) | Approx. ¥56,600 | Approx. ¥28,300 |
| Total Interest over 5 Years | Approx. ¥396,000 | Approx. ¥702,000 |
| Total Cost over 5 Years* | Approx. ¥3,396,000 | Approx. ¥3,402,000 |
*The GFV loan calculation assumes you buy the car at the end of the term. The total cost for the GFV loan is the sum of the total monthly payments (approx. ¥1,698,000), the final GFV payment (¥1,500,000), and the total interest (¥702,000).
Key Takeaways from the Table
- A Drastic Difference in Monthly Payments As the table clearly shows, the GFV loan’s monthly payment (approx. ¥28,300) is less than half of the conventional loan’s (approx. ¥56,600). This is the biggest selling point of GFV loans, as they allow you to drive a car you might not otherwise be able to afford.
- Total Interest Is Nearly Double Even with lower monthly payments, the GFV loan’s total interest (approx. ¥702,000) is significantly higher than the conventional loan’s (approx. ¥396,000). This is due to the fact that interest continues to be charged on the GFV portion (¥1,500,000) throughout the entire contract term.
- The Total Cost Can Be Higher If you choose to buy the car at the end of the term, the GFV loan ends up costing slightly more than a conventional loan. This difference is the cost of having lower monthly payments over the contract period.
Summary
Although both loan types charge interest on the vehicle’s full price, the key difference is that with a GFV loan, the principal amount of the GFV portion never decreases during the repayment period. This is why the total interest is higher.
The total cost of a GFV loan depends on whether you choose to buy the car or return it at the end of the contract. Therefore, for those who want to own a car for a long time, it is crucial to understand the total cost before making a decision.
