What is Car Residual Value & Should You Care?
What is Car Residual Value & Should You Care?
Posted on July 12, 2023
If you’re planning to lease a car, you need to understand what residual value is. It forms part of the lease agreement and helps determine how much you’ll be paying each month.
Our Binbrook auto loans team explains what vehicle residual value is and how it impacts the monthly cost of a vehicle lease.
What Is Vehicle Residual Value?
Residual value is the value of the car at the end of the lease. It helps determine how much you’ll be paying each month for that lease.
For example, say your car is worth $30,000 new. The estimated residual value after a 36-month lease is $15,000. That means the lease has to cover $15,000 depreciation plus any charges, fees and taxes. All that is divided by 36 monthly payments to make up your lease cost.
Different leasing companies have different fees and costs but that’s the general method of working out the cost of a lease.
How Leasing & Residual Value Works
When you’re discussing a lease with a dealership, they may already have the terms and the costs worked out or they may not. If not, you’ll work it out between you there and then.
It works a little like this:
- Decide on the vehicle cost of the car you want to lease. Subtract any trade-in or down payment from that cost.
- Decide how long you want the lease to run for, typically 12, 24, 36 months.
- Determine the residual value of your chosen vehicle at the end of that term using Kelley Blue Book or another reliable source. The dealer may have a preferred method of doing this.
- Work out the cost of depreciation using the initial cost and subtracting the residual value.
- Add lease charges, fees, and any taxes to the amount and diving by the lease term.
What you should have at the end is a fixed monthly cost that takes all that into account and provides a sensible, affordable lease fee you’ll pay each month.
Using the example above, that $30,000 car loses 50% of its value over 36 months. That means you’ll pay that $15,000 depreciation plus charges, fees, and taxes. Divided by 36 monthly payments, you’ll end up with something around $500 per month.
That’s obviously very rough working out but you can see how it all works.
Minimizing Lease fees
You can lower that monthly lease fee in a couple of ways.
You can put more money down – Using a trade-in or larger down payment will go towards that residual value so you should end up paying less each month.
Go for a car that depreciates less – Some vehicles depreciate less than others. Selecting one of these cars should mean a higher residual value and a lower cost to lease. Check reviews or do your research to see what cars depreciate the slowest.
When you’re ready for a car lease or loan, get in touch with the Binbrook auto loan experts at Northway Ford for great deals on auto finance.
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