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    What Is 'Residual' Value When Leasing A Car?

    Leasing

    When you choose to lease a car, you’ll hear the term ‘residual value’ over and over again. The residual value can be defined as the estimated value of the car at the end of a lease period. It can also be used to determine your monthly lease payments. 

    While calculating your monthly payments for the lease, the lender will add the depreciation value of the vehicle. This is the starting cost subtracted by the residual value plus the additional interest, fees, and taxes.

    For instance, let’s say you lease a car with an MSRP of $30,000 for a three-year term. According to the lender, the car has a residual value of 60%. This means that this car is estimated to be worth 60% of the MSRP by the time your lease ends. Thus, 60% of $30,000 is $18,000. 

    Residual value isn’t the only important factor in the lease agreement. Your down payment, taxes, interest rates, and fees are also part of it. Keep reading to learn how to calculate residual value and its impact on the lease amount.

    How To Work Out Residual Value

    Every dealership calculates residual value differently. Go through various retail value guides to help you get through the situation. Lease the ones with high residual values so that your monthly payment is less. Ultimately, it’s the lender that gets to finalize the amount and not you. It’s good to have a proper idea of the lowest and highest residual values so that you can make an informed decision.

    The difference between the selling price and the residual value is what makes up the bigger part of your lease amount. Based on the above example, your estimated lease payment will be the difference between the selling price ($30,000) and residual value ($18,000), i.e. $12,000. This $12,000 will be divided by the term (36 months), which means you’ll pay around $333 per month. Taxes, fees, and interest will also be added to this monthly amount.

    Low vs High Residual Value

    The residual value affects the monthly payments of the lease. A higher residual value means a higher monthly payment. Similarly, if you choose to lease a car with a low residual value, the monthly payments will be low. Popular labels and models with traditionally high resale prices typically have higher residual values.

    • Look for a car with high residual value if you plan to lease for a certain amount of time and move on. On the other hand, if you have an idea to purchase another car by the end of the lease term, go for a lower residual value car even though your monthly payments will be slightly higher. It would be a smart idea because, at the end of the lease, the purchase cost will probably be your residual value and the purchase fees. This helps you stabilize your financial needs when you have to shell out money for a new vehicle
    • A car with a high resale price keeps the used car market in profit. One reason car manufacturers encourage you to lease a car with high residual value is because of the resale price. When it comes to individual sellers, they tend to sell low residual value cars more. This is so that they can have a large monthly inflow of money and don’t have to worry about the amount they paid for the investment

    What Should You Take Into Account

    There are multiple factors that you must consider before choosing to lease a car.

    • The most significant aspect to consider in leasing a car is the down payment and the depreciation of it over time. The depreciation will have an impact on your monthly payments. It can be high or low, depending on the residual value
    • You should also consider the down payment, interest, taxes, fees, and other charges that will be part of the lease
    • Take into account the lease type, for example open-ended and closed-end leases. Be clear about the lease terms of each before accepting to the terms

    Bottom Line

    As mentioned, the residual value of the car is the driving factor behind the lease’s monthly payments. Try looking for cars that have a higher residual value as it’ll help lower monthly payments. Compare quotes from various lenders, review your credit score and other eligibility criteria, and get a clear estimate. Finally, take into account the additional charges, taxes, and fees before you sign the deal.