Vehicle Residual Value
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One important piece of information that applies to car leasing is the concept of a car's residual value. We'll help you wrap your mind around what it is and why it's important to ensure you enter into car lease negotiations armed with knowledge that could save you money.
What Is a Car's Residual Value?
A car's residual value is an estimate of how much your car will be worth when your lease is up. This number is factored into your monthly car lease payments, so it's helpful to do some research on your own to understand what the estimated residual value of your vehicle may be.
A great place to start is by dong some online research on the resale value of your car. Choosing a car that holds its resale value over time will give you a higher residual value.
To calculate the residual value of your car, try an online tool like the one offered by Cars.com. You can choose the make and model of your vehicle and it will calculate both the MSRP and the estimated residual value, and apply those to several leasing options.
Why Is Residual Value Important?
The residual value is important for two reasons:
- The depreciation amount between your car's current value and residual value is used to calculate a portion of your monthly payments.
- It also determines how much you will pay if you buy your car at the end of your lease.
Essentially, the residual value of a car helps you understand what you are paying now and what you'll be paying later for your new vehicle.
Calculating Residual Value
A residual value calculation is done by applying the estimated depreciation value of your car as a percentage of your monthly payments.
Here's a hypothetical EXAMPLE of how a situation might work out:
- You sign a 3-year lease on a car worth $20,000.
- At the end of your lease, the residual value is determined to be $10,000.
- During your lease, the car will lose 50% of its value.
- That 50%—in this case, $10,000—will be spread out through your monthly lease payments.
Tips for Lease Negotiation
Since a car's residual value is an estimate, it is definitely a negotiable part of your lease.
Do Your Research
As stated earlier, look into the historical resale value of your vehicle. Do your own calculations to figure out how much you think the car will depreciate over time. If the dealer's number is significantly higher than your estimate, ask them to go back to the drawing board.
Compare Residual Values
The best way to find the right residual value for your car is to ask different lessors for the residual value on the car you are interested in. That way, you'll go into your lease negotiations armed with a number you feel confident with.
Increase Your Down Payment
If you are looking for lower monthly payments, the car's residual value can sometimes be artificially increased—this is referred to as a “subvented" lease. However, when your lease is up, you might be forced to buy your car above market value.
Instead of using the residual value as leverage for lowering payments, offer a down payment. This will keep your residual value lower as well as your monthly payments.
If negotiating the residual value doesn't have the impact needed to strike a deal, you may want to opt for a lease assumption. You can find more details on our Lease Assumption page.
For more information about leasing in general, please refer our Leasing 101 guide. It's packed with useful information that will make you an expert on the subject of leasing a vehicle.