Chapter 1C: How Residual Lease Values are Calculated
Residual means the part that is left after some of it has been taken away. The residual lease value obtains its calculation from a base price, calculated after depreciation. You pay for the portion of the car’s value that you use when you are leasing. For example, if you lease a car originally worth $30,000 for three years, and by the end of the lease, it’s worth $15,000, this means you used $15,000 worth of the car’s price or 50 percent of the cars original price. The payments you are making would be $15,000 divided by 36 monthly payments making each payment $416 (along with interest, tax, and related fees).
Let’s use the same example but say that the car didn’t lose 50 percent of its value over three years, but it only lost 40 percent of its value. This means that your $30,000 vehicle would have only lost $12,000 of its value. Your payments would drop down to $333 a month (plus interest, tax, and fees).
With both of these examples, you can see that the residual value has significantly decreased the monthly payment. The low monthly payments without a large down payment are one of the significant advantages of leasing. What if three years go by and you decide you want to purchase the car? If the residual value has been artificially inflated to give you low monthly payments (to move slow-selling cars off the lot and is called a subvented lease), then you will need to pay more for the vehicle than an identical used car.
When shopping for a car and negotiating your lease contract, make sure to look out for residual values. Residual values are set by the banks that issue lease contracts and are usually non-negotiable. This is their best guess at what the car will be worth by the end of the lease. They use data from the past on different car models to form their predictions on what consumer taste will be.
It’s a good idea to shop for a lease based on the residual value. The less a car depreciates, the less you pay to use it which is why you can afford to drive a more expensive car when you lease instead of buy.
The residual value is a large factor of leasing which is why it is crucial to understand it and calculate it in each vehicle you are considering. It is important to make sure to see which cars hold their value well and be mindful that residual values differ yearly.
Residual values aren't the only factor in your lease payment, but they are one of the most important values to consider. Driving your leased vehicle will feel a lot more rewarding if you watch these values carefully. Good car deals are easy to find when car shoppers search for vehicles with high residuals and calculate their monthly lease payments. You can save money during your lease period by researching the best vehicle with a high residual.
