Leasing a car can be a daunting process, whether you’re after a super economical and affordable Toyota Camry, or want something snazzier like a BMW 3 Series. There are a lot of factors that can play into what sort of deal you get, and ultimately how much money you are putting down each month. While some despise leasing, as the car isn’t yours when your lease period is finished, others love the ability to jump into a new car every few years, getting the latest designs and technology, and always having a valid warranty.
If you have ever leased a car or have done any research on the topic, then you will have heard the phrase “residual value” thrown around by the sales or finance department. It is a key part of any lease deal, and you should be aware of what it means before going to negotiate. In this article, we will look at what residual value is, how to calculate it, and what affects it.
Understanding Exactly What Residual Value Is
Residual value is the overall worth of a car at the end of the lease, or the price you’ll pay to buy it at the end of the lease period if that is something you’re interested in. Leasing a car is different from renting one in that the lease period is usually longer and your monthly payments go toward the expense of the vehicle’s depreciation. You may hear of businesses or insurance company rental cars that are on a long-term rental also referred to as a lease, but that is different to the regular lease a private individual signs at a dealership, and will not be covered here.
Salvageable or residual value is comparable to the worth of a car after depreciation or the gradual decline in value. The residual value of a car is often established by the dealership or leasing firm and remains constant, whereas the resale value of a car is subject to market circumstances. A car’s resale value is determined by a number of factors, including the time of year.
Is Residual Value The Same As Resale Value?
These two terms, while similar on the surface, are not the same but can affect one another.
Residual value is the agreed-upon value that the automaker or lease firm thinks the vehicle will be worth when your lease period is finished, and it’s time to hand back the keys. Resale value is the real value of the car at any given time.
Since resale value as a figure fluctuates, a car might have a poorer resale value than expected and this can affect both the lessor and the company leasing the vehicle. But this can work both ways, as a car that garners a particularly good reputation may be worth more after the lease period, and you could choose to buy it at the lower agreed-upon residual value that cannot change.
But if the resale value is lower than expected of a given model, it can hurt the automaker or lease firm. Nissan has called out its failure to calculate correct residual values as a big contributor to recent losses in the company’s books, with many cars being worth less than expected when the leases were complete.
What Factors Determine Residual Value?
The first and main factor is the state of the economy. A car’s residual value may rise somewhat during periods of economic development or boom, and may decline during recessions when fewer people buy cars. Many individuals may find leasing a car more attractive than buying a new one due to shifting economic conditions, which might have a big impact on a car’s residual value as demand increases. A car’s value might also be negatively impacted by other factors, like rising petrol costs for SUVs or performance cars, or tax credit changes like with most EVs.
As we mentioned in the previous section, residual value may also be calculated using the car’s resale value. Because they undergo less depreciation, cars with greater resale prices may also have higher residual values. Brands like Lexus or Honda, or specific models like the Mercedes-Benz G-Class, which are hot in the market, will have a greater resale value used, giving them better residuals. A sort of offshoot from this is model age. If a car has been on the market for some time, and has become a little stale, or is not necessarily the best in class anymore, companies might offer better lease deals to keep units moving.
The last factor is reliability ratings. Lease companies might calculate a car’s residual value based on how well it performs over time. Generally speaking, a car with a higher rating is less likely to break down and require expensive repairs. A car with a lower rating may be more likely to require repairs. Again, Asian brands do well in this regard, while companies with known reliability issues like Jaguar or Masirati might struggle to move units, meaning a better lease deal.
Calculating Residual Value
If you want to figure out your monthly auto lease payments and prevent spending more than you can afford, knowing how to calculate residual value is crucial. You may be aware that an automobile depreciates more the longer you drive it, but in order to get its precise residual value, you must multiply the vehicle’s manufacturer’s suggested retail price (MSRP) by the residual value percentage rate. Here is an example:
- You walk into a dealership, and sign a lease for a three-year lease on a vehicle worth $30,000.
- At the end of your lease, the expected resale value of the vehicle comes to $15,000.
- This means that during your lease the vehicle will have lost 50% of its value.
- Consequently, the $15,000 lost will be spread across your monthly lease payments.
Examining the lease agreement is the easiest way to get the residual value percentage rate. You can ask the lessor to supply this amount if it is not included in the agreement. There may not be a residual value for older vehicles with lower resale prices. The market worth of the car for the term and the necessary miles are usually the first things used by leasing companies to determine residual values. Most vehicles are about 60% of their original MSRPs at the end of the lease agreement.
Benefits Of A Higher Residual Value
You are effectively paying for less depreciation if a car is anticipated to keep most of its residual value at the end of the lease. Your monthly payments will be more reasonable as a direct result of this. A car with good residuals is also generally easier to roll into a new lease. This means you can move to the same or higher class of car instead of overpaying for a car that will have a low residual value by the end of the lease.
For leasing companies, a better residual value huge deal as it means they won’t lose money. If a car tanks in value and its residual value is lowered, this means the companies will end with a loss.
How Knowing The Residual Value Will benefit You When Leasing A Car?
By staying informed on market trends, car resale values, and the economy, you should be able to find great deals out there for all sorts of cars. Some have even made a sport out of getting as perfect a lease as possible with forums on sites like Leasehackr having people post their tips and tricks. If you stick to reliable, mainstream brands that have good resale value, then you can get a great car, worry free. On the flip side, if you truly want a dirt cheap lease, watch out for older models that are coming to the end of their run. These cars might have poorer residual value, but the OEM incentives may be too good to be true.
Sources: CarAndDriver, NationaVehicleSolutions.co.uk; USNews; VelocityAssetFinance; Vanarama