The Residual Value of Leasing

Each year, the Automotive Leasing Guide releases its residual value awards. Most people don't pay attention to this, but if you're thinking about leasing car, you should. That's because the residual value of a vehicle is one of the variables that determines your monthly lease payments.

What is residual value of leasing?

"Residual value" is what a car is worth at the termination of a lease. If you lease a new car for three years, it will depreciate during that time. The car's worth at the end of the three years is its residual value. If you wanted to purchase the car at the end of your lease, this is often the price you'll pay for it.

Who determines the residual value

The company or bank responsible for the lease contract sets the residual value at the start of the lease. It bases the value on data taken from past models of the same car, and projected consumer interest. In many ways, the residual value on your contract is simply a best guess as to what the car will actually be worth at the end of your lease. Residual value estimates are not identical -- they can vary from company to company, even for the exact same car and lease term.

How does residual value affect my lease payment?

The amount you pay to lease a car depends heavily on the residual value estimate. Much of the car's lease payment covers the difference between the value of the car today and the value of the car at the end of your lease. This means it costs less to lease a car that holds its value well over time. As you car shop, and consider different cars to lease, you can greatly reduce the amount you pay to lease a car by shopping for cars that historically hold their value well.Each year, the Automotive Leasing Guide releases its residual value awards. Most people don't pay attention to this, but if you're thinking about leasing a car, you should. That's because the residual value of a vehicle is one of the variables that determines your monthly lease payments.

What is residual value of leasing?

"Residual value" is what a car is worth at the termination of a lease. If you lease a new car for three years, it will depreciate during that time. The car's worth at the end of the three years is its residual value. If you wanted to purchase the car at the end of your lease, this is often the price you'll pay for it.

Who determines the residual value?

The company or bank responsible for the lease contract sets the residual value at the start of the lease. It bases the value on data taken from past models of the same car, and projected consumer interest. In many ways, the residual value on your contract is simply a best guess as to what the car will actually be worth at the end of your lease. Residual value estimates are not identical -- they can vary from company to company, even for the exact same car and lease term.

How does residual value affect your lease payment?

The amount you pay to lease a car depends heavily on the residual value estimate. Much of the car's lease payment covers the difference between the value of the car today and the value of the car at the end of your lease. This means it costs less to lease a car that holds its value well over time. As you car shop, and consider different cars to lease, you can greatly reduce the amount you pay to lease a car by shopping for cars that historically hold their value well.

How does residual value affect your lease purchase option?

The residual value is often what you'll pay for the car if you decide to purchase it at the end of a lease. However, some leasing companies -- generally, those that are owned by auto manufacturers -- choose to artificially inflate the residual value of a vehicle, which keeps the monthly payments low. This is called a subvented lease. A high residual value means that at the end of the lease, you will have to pay more to purchase the vehicle than it's probably actually worth. It would make more sense to purchase an identical used vehicle instead of the one you're leasing.

Where to get more information

The Automotive Leasing Guide offers insights into residual value online. Also, the Black Book offers data on residual values, but it's a tool used mostly by auto dealers and bankers with a subscription fee. You may be able to get a hold of a copy at your local bank.

The residual value is often what you'll pay for the car if you decide to purchase it at the end of a lease. However, some leasing companies -- generally, those that are owned by auto manufacturers -- choose to artificially inflate the residual value of a vehicle, which keeps the monthly payments low. This is called a subvented lease. A high residual value means that at the end of the lease, you will have to pay more to purchase the vehicle than it's probably actually worth. It would make more sense to purchase an identical used vehicle instead of the one you're leasing.

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