The residual value of leasing

If you are in the market to lease a vehicle, you will hear the term 
“residual value” recur like a leitmotif. A residual value does not only 
affect your monthly payments, but is equally used by leasing companies 
to determine any penalties should you break your lease early and how 
much to pay if you decided to buy the vehicle at the end of your lease.

Let us first start by looking at the meaning of residual value. The 
term “residual value”, refers to the value of something after it has 
been used for some time. In leasing lingo, it refers to the 
depreciation of the vehicle’s value over the life of its lease. 
So how does it exactly affect your monthly payments? When you lease a 
car, you pay for the car’s value that you use over the lease length. 
Suppose you leased an $18,000 car for 2 years: the leasing company 
needs to estimate the value of this car in two years time in order to know 
how much of the car you will be using during your lease term. That’s where 
the “residual value” comes into the equation. If the residual value is 
estimated to be $13,000 at the end of your lease, then your monthly 
payments will be calculated on the $5,000 you will use over 24 months, 
giving an average monthly payment of $208.3 (plus interest, tax and fees). 
How about if the car is expected to lose half its value over the same 
period? In this scenario, you will be using $9,000 over the same period, 
leaving you with a higher monthly payment of $375 (plus interest, tax and 
fees).
As you can see, residual values are a key factor in determining how much 
money to pay on your lease and the higher the residual value, the lower 
your monthly fees. This works in reverse if you build a bond with your car 
and decide to purchase it at the end of your lease. If we stick with the 
same example above, the lower monthly payments in the second scenario come
at the cost of paying substantially more to buy your car at the end of the 
lease. 


So, since the residual value is so important, how do I know which one is 
best for me? Well, it all depends whether you want to purchase the car at 
the end of your lease. If you don’t want to make a large down payment and 
you want low monthly payments, then a car that holds with a higher residual 
value is a good deal. If you are thinking of purchasing the car at 
lease-end, then you need to balance low-monthly payments with a moderate 
residual value.



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