Alternate name: residual lease value
For example, suppose you’ve leased a car and are turning it in. The leasing company sets the residual value of your car at 50%. If it has a manufacturer-suggested retail price (MSRP) of $38,000, your car’s residual value is $19,000.
How Does Residual Value Work?
The residual value is projected by the lending institution holding the lease contract. They may reference several industry resources, but every lender calculates residual value differently. The lender will use the residual value as one of the main determining factors when calculating your monthly lease payment. They’ll do the calculation as follows: So, if you’re leasing a $30,000 vehicle that is expected to depreciate by 20% over a one-year lease term, the car’s residual value at the end of the lease period would be $24,000. You’ll pay $6,000 for the vehicle’s depreciation ($30,000 minus the residual value). That amount plus rent charges, taxes, and fees gets divided by 12 months, resulting in a $500 monthly payment before taxes and fees.
Residual Value Considerations
If you’re looking to lease a vehicle for a set period and then move on with your life, looking for a car with a high residual value is a good idea. If a car retains more of its value, the depreciation amount and monthly payments will often be lower. Ultimately, it will be the lender and not you who determines the residual value, but it’s a good idea to have a general sense of the vehicles with the highest and lowest residual values.
Residual Value Can Lower the Purchase Cost
If you plan to purchase the vehicle at the end of the lease term, one good choice is to find one with a lower-residual-value. While you’ll pay more monthly during the lease term, the purchase cost at the end of the lease will be lower—the residual value plus any purchase-option fees.
Residual Value Can Be Used as a Comparative Tool
Keep in mind that discrepancies can occur between the residual value and market value at the time when you’re ready to buy the car. This is because the lender may incorrectly estimate the car’s value at the end of the lease term. A lease buyout is generally worthwhile when the residual value is lower than the market value. If the residual value is greater than the market value, you will pay more for the car than it is worth. It’s also a good idea to compare the total cost of leasing and purchasing to buying the vehicle from the start. By comparing, you can choose the cheapest method and save some money.
Residual Value Isn’t the Only Factor
Residual value isn’t the only aspect to consider when leasing a car. The amount you must put down upfront, the interest rate, and the taxes and fees are other important considerations. If you have a poor credit score, your interest rate will likely be higher, and it’s even more important to shop around for the best interest rate if you fall into this category. A high interest rate or high fees associated with a poor credit score can add a significant amount to your monthly payment and the total cost of leasing a vehicle.
Residual Value vs. Salvage Value
The term “residual value” is sometimes used interchangeably with “salvage value,” but residual value is more commonly used in leasing to refer to the projected value of a car at the end of the lease term. The salvage value may be much lower than the residual value, depending on the car’s condition at the end of the lease, which may be well before the end of the car’s life. Moreover, whereas a lender would estimate the residual value based on the cost and lease term, an insurance adjuster will estimate the salvage value based on the cost of vehicle disposal and previous auction values for similar salvaged cars.
