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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