Negotiating a Lease
Residual price or lease end buyout
Next to your Capitalized Cost ("cap cost") the biggest leverage item in your lease is your Residual Price. The Residual Price is the amount the car is expected to be worth at the end of the lease. The purpose for this price is to determine how much the vehicle will depreciate during the term of the lease so that you can determine how much you owe while you are making payments.
Here's an example of the same car with two different car payments based on nothing other than the residual price difference:
Vehicle A |
|
Vehicle B |
|
Cap Cost |
$20,000 |
Cap Cost |
$20,000 |
Term (months) |
36 |
Term (months) |
36 |
Residual Price |
$7,000 |
Residual Price |
$10,000 |
Monthly Payment
(before interest & taxes) |
$361 |
Monthly Payment
(before interest & taxes) |
$277 |
Notice that the Monthly Payment for Vehicle A is over 26% higher than the payment for Vehicle B. The difference is the Residual Price.
Dealers do not necessarily set residual prices. These are often set by banks that derive these numbers from statistics and reports on the values of vehicles when they are returned from leases. Companies like ALG (Automotive Lease Guide) provide these values to dealers and banks that use them as a reference point for designing leases.
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