Residual Value

 

Residual Value? What does it mean?

Residual Value

Residual Value

The Residual Value is the resale value of the car at the end of your lease. Residual value is not determined by your car dealer, but can have an enormous impact on your lease payment. Residual values are used by banks to determine the risks, money factors and costs of car loans and leases. The residual value is determined by Lenders or Lessor because they are the ones who stand to either make or risk the money for leasing the car.  Banks may lose money on car leases if the residual value is higher than what they are able to sell the car for. There are automobile research companies, working on behalf of lenders who publish the residual values of every car model for every year. You can see that keeping a database of accurate residual values would be an enormous task. Residual value is stated as a percentage of the car’s original MSRP. For example: If a 2009 Subaru Legacy with an MSRP of $24,000 was estimated to be worth $16,000 after 3 years, the car’s 3-year residual value would be listed as .60 or 60% ($14,400/$24,000)

Is it Better to have a Higher or Lower Residual Value?

Your monthly lease payment, in part, is calculated by taking your vehicles capitalized cost (the price you agreed to pay for the car) and subtracting it from your cars estimated resale value. The difference is the deprecation portion of your lease payment. In the case of the Subaru example above, your depreciation cost would be $96,00 or ($24,000 – $14,400). As you can guess, a higher residual value will lower your depreciation costs which in-turn will lower your monthly payments. There are a few other considerations. A residual value that is too high can make it more difficult to get out of a car lease early or negotiating a trade-in with your dealer.

Is the Residual Value Negotiable?

While the residual value is not a fixed number like the MSRP, it cannot be changed by the dealer. Residual values are financial considerations which can only be tweaked by the bank who is lending the money. Indirectly, residual values can be considered somewhat negotiable since it is in the dealers best interest to shop for the financial terms that will help them make the sale. In some cases, that may mean finding a back who is willing to be a little more aggressive with your car’s estimated residual value.

 

 

 Posted by at 3:16 pm

  2 Responses to “Residual Value”

  1. Hello,
    Please do some more research on how residual
    Value is determined. Independent companies
    Determine lease values, not the banks or dealers
    Or anyone else. Many variables determine residual.
    For example; one year ford allowed one of their best selling
    To be one of enterprise rent-a-cars’ hit car! The
    Market was flooded with them in the following years.
    What do you think that did to the value of the mustang?
    Anytime there is a major commodity, value decreases.
    Lease analysts knew what would happen in the coming
    Years, and appropriately adjusted the residual for that car.
    Thanks!
    Kathy Curtis
    Finance Manager
    Lake Nissan

  2. Correction… I meant to say
    … For example; “say one year ford allowed…”

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