Car Leasing Residual Value Explained

With leasing gaining popularity as the most financially advantageous way of driving a car, it becomes important to understand the Residual Value of used vehicles to help make decision that is best for you. An important part of leasing equation, Residual Value directly affects your monthly payment since leases are calculated on the difference between the Residual Value and the actual selling price.

Usually expressed as a percentage of MSRP (Manufacturer's Suggested Retail Price), Residual Value is the estimated value of a leased vehicle at the end of the contract period. It is based on the duration of the agreement and average mileage. Contrary to common perception, Residual Values are never set on negotiated price.

How Residual Value affects monthly payments?

If you choose to lease a car you finance the usage of the car and pay only that portion of the car’s value which you use. For example if you lease a $25000 car for a period of three year and the car in question is worth $15000 at the end of the term, then you monthly payment would be $10,000 divided into 36 monthly payments of $277. Interest, taxes and other fees would also be added to you payment. Here you pay only for the used portion of the car. Now, if your car had lost only 5000 of its value while you used it, you would be required to pay $139 along with interest, taxes and other fees.

It is very obvious from the example above that the residual value directly affects your monthly payment.

How Residual Value is determined?

Residual Value is determined by factors like duration of the contract period, expected average annual mileage, make and model of the car, resale history, anticipated future supply and demand, and other anticipated market and economic conditions.

A typical Car Leasing Company in UK relies on industry sources of residual data such as ALG and Blackbook for setting their own values and it may adjust those values up or down, as it may think fit. Projections are also based on the data from past models and an anticipation of consumers’ tastes in future.

Estimates are based upon different factors and sources and therefore Residual Values may differ from dealer to dealer for the same vehicle. Residuals are not constant or fixed for a particular car.

Residuals have been considerably high over the last few years as a result of intense competition in the industry. This has come to benefit a large number of leasing consumers.