Archive for the ‘Residual Value’ Category

What is the Residual Value of My Car?

Tuesday, March 13th, 2012

The residual value of your car is determined at the time of the signing of your lease agreement. The dealer uses this residual value to calculate your monthly car lease payment. Therefore, the residual value of a car that you are interested in leasing or that you have already leased becomes identifiable as soon as the dealer has prepared a lease deal with details including the required down payment and the required monthly payment.

If you want to know the exact residual value of your car, several methods are available in order to find out. Here are three different ways to find out the exact residual value of your car:

  1. Check your lease contract/lease agreement which definitely documents the residual value.
  2. Ask the dealer during the time when you are signing your new auto lease agreement.
  3. Call the finance company to whom you are responsible for making your monthly payments every month and ask them to provide you with the residual value of the car you have leased.

Although they may not precisely represent actual residual values, information about residual values can also be found online on websites like Cars.com. Keep in mind that precise residual values may vary from one finance company to another.

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What is Residual Value?

Friday, March 9th, 2012

To put it simply, the residual value is the projected or estimated value of a car at the end of a lease term. The residual value at the end of a lease term is obviously significantly lower than a car’s original MSRP or sticker price. In fact, the longer your lease term, the lower the residual value of your car at the end of your lease. For example, a three year lease will have a lower residual value than a two year lease.

Why should you care about residual values?

Residual values are important because they are used to calculate your monthly lease payment. Automobiles that have higher depreciation have lower residual values. The lower the residual value of a car for a given lease term, the higher the monthly lease payments. Therefore, automobiles with comparatively higher residual values will have lower monthly payments.

The amount that a car depreciates over time can be affected by the number of miles driven. Most lease terms have 10,000, 12,000, or 15,000 miles-per-year limits. A car that has 15,000 miles added to its odometer every year will depreciate faster than a car that has 10,000 miles added, which explains why a leased car at a 15,000-miles-per-year limit will have a higher monthly payment.

Who comes up with residual values?

Residual values for specific make and model of cars are generally pretty similar to one other but can vary to some degree. Finance companies and other banks are responsible for setting residual values for different cars based upon their historic values after a specific number of months or years.

It is important to note that residual values can be artificially inflated in order to attract customers with lower monthly payments. This practice is most common with finance companies that are owned by car manufacturers, because they can more easily position themselves to lose money. As mentioned before, the agreed upon annual mileage limit on a car can also affect a car’s residual value; cars with lower annual mileage limits will have higher residual values.

How do you come up with residual values?

Residual values are most often expressed as a percentage of the MSRP. For example, a car with a 61 percent residual value with an original MSRP of $22,500 has a residual value of $13,725 when expressed in dollars.

Although residual values for a particular make and model may vary to some degree, you can get a fair idea of what the residual value for a specific make and model car is by visiting the tool available on the Cars.com website. However, the best way to determine the exact residual value for a car with a specific lease term is to simply ask the dealer.

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What is an Open End Lease?

Monday, February 27th, 2012

There are generally two types of automobile leases available including the open end lease and the closed end lease. In this article, we will discuss the open end lease. The open end lease is a type of car lease that is primarily used for business customers and allows for a bit more flexibility at the end of the lease, which can often times be advantageous or perhaps disadvantageous to the lessee (the individual or business that has leased the vehicle).

The essential distinguishing feature of the open end lease is that the difference between the residual value and the market value of the vehicle at the end of the lease is taken into consideration. Depending on the terms of the lease, the lessor or leasing company could be held responsible for paying you, the lessee, for the difference between the residual value and the market value if the market value is higher. However, the opposite can also be true. That is, if the market value of the car at the end of the lease is lower than the agreed upon residual value, you the lessee can be held responsible for paying for that difference.

Generally, open end leases are rarely the option chosen or provided to most customers that plan to use their cars for everyday, personal needs. To learn more about the differences between open end leases and a closed end leases, visit the link below.

Related Articles:

Closed End Lease vs. Open End Lease

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Video: How to Calculate Your Car Lease Payment

Saturday, January 7th, 2012

In this video, learn the secret formulas that dealers use in order to calculate car lease payments from start to finish. By learning the formulas that dealers use, you will fully understand what a lease payment consists of, which allows you to better negotiate a good deal on any future car leases.

Closed End Lease vs. Open End Lease

Sunday, September 4th, 2011

There are two different types of car leases. One is called the closed end lease and the other is called the open end lease. A closed end lease is more common for most car leasing customers like you. Your car lease agreement or lease contract should specifically mention whether you have a closed end lease or an open end lease. So let’s go ahead and discuss the differences between and the advantages of each type of lease.

Closed End Lease
A closed end lease is also known as a “true lease”, “walkaway lease”, or “net lease”. A closed end lease is probably the type of lease that is most suitable for people like you and me. Designed mainly for consumers as opposed to businesses, a closed end lease allows you to return the car at the end of the lease with no questions asked. Of course, you may have to pay for excessive wear and tear or damage to the vehicle as well as for having an excessive mileage beyond what was covered according to your lease agreement.

With a closed end lease, the leasing company or finance company sets the residual value of the vehicle based upon the annual mileage limit. For instance, if you were to lease a Honda Accord with an annual mileage limit of 12,000 miles for three years, the car would probably retain about 61 percent of its original MSRP. The leasing company comes up with this residual value based upon how much they predict that the value of the car will depreciate given that the lessee will drive a certain number of miles by the end of the lease.

You also have the option to purchase the car at the original residual value that was set by the leasing company on the day that you leased the car. This is definitely a smart decision if the car is worth more than the residual value. If it is, you could probably sell it for a profit. If you don’t, you can continue to drive the car for as long as you please.

Open End Lease
So what is an open end lease? With an open end lease, a residual value is still determined at the time when the lease agreement is signed. However, you, the lessee, is held financially responsible if the value of the car is less than the agreed upon residual value at the end of the lease. This means that you would have to pay for the difference between the residual value and the value of the car at the end of the lease term if the value of the car ends up being less than the agreed upon residual. On the other hand, if the value of the car at the end of the lease term is worth more than the residual value, the leasing company will pay you the difference between that value and the residual value. As you can probably tell, open end leases can cost more than closed end leases. They are generally used more for commercial business leasing.

What Type of Lease is Better?
If you are a consumer who is interested in leasing a vehicle with a good monthly payment, you should always lease a car with a closed end lease. You will save a great deal of money by avoiding a large sum of money that you would be liable to pay with an open end lease if your car’s value has depreciated more than expected.

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What Are People Who Lease a Car Paying For?

Saturday, June 5th, 2010

Many people who are interested in leasing a car often wonder what exactly they would be paying for every month if they were to lease a car. When you lease a car, the bulk of your monthly payment comes from the difference between the car’s selling price and its residual value. This is known as the vehicle’s depreciation. The other two smaller components of your lease payment include the finance charge and sales tax.

To sum up, you are paying for 3 things that make up your payment every month:

  1. Depreciation Fee
  2. Finance Fee
  3. Sales Tax

You can learn more about monthly car lease payments or calculating car lease payments by visiting the links found under “Car Lease Guide.”