The value of your car at the end of your lease is called the Residual Value. In the example above, the Residual Value at the end of three years was $10,000. When creating your lease, the leasing company predicts how much the car will be worth at the end of your lease. They do this by using industry guidebooks like the Automotive Leasing Guide (ALG) that track the value of cars at the end of their lease. Not every company uses ALG – some set their own residual prices based on their own needs.
The higher the projected residual at the end of your lease, the lower your monthly payment.
If you consider that your largest portion of a payment is the depreciation, then it is important to know how depreciation is calculated. The formula is very simple, but always starts with understanding what term you will be considering (36 months, 48 months, etc.). If you already know the residual value, the term of the lease, and the capitalized cost, you are ready to calculate your depreciation. Once you have these values in hand, the math is simple:
Capitalized Cost minus Residual divided by Lease Term.
Take a look at this example:
Capitalized Cost $25,000
Residual Value $10,000
Term 36 Months
Depreciation per Month $416.66
Let's apply this formula to the above factors:
Capitalized Cost ($25,000) minus Residual ($10,000) = $15,000
$15,000 is the total amount of depreciation over a three year period. Now simply do this:
Divide (total amount of depreciation) $15,000 by Term of Lease (36 months) = $416.66 per month
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