What Is Residual Value?
Residual value is an estimate of what a vehicle will be worth at the end of a lease, and it is a key factor in the cost of a lease. The residual value is set by the leasing company (the lessor) at the start of a lease. On leases that allow purchasing the vehicle after the lease ends, the residual value also sets the purchase price and is not negotiable.
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It is a major factor in the cost of a lease because the difference between the capitalized cost — the “price” of the vehicle at the start of the lease — and the residual value is how much the lessee (that’s you) will have to pay over the course of the lease. Basically, the lessee pays for the depreciation that the leasing company expects over the term of the lease.
For example, say that a vehicle has a capitalized cost of $30,000 (this is not the MSRP, but a discounted price) at the start of a 36-month lease. If the residual value is set at $18,000, then the lessee would have to cover the projected depreciation of $12,000, or about $333 per month. (This does not include finance charges, taxes or other lease fees.)
Residual values are based on historic resale values for individual vehicles and brands, trends in new- and used-car sales and, to some extent, crystal-ball gazing because the future is hard to predict.
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Brands that traditionally command high resale value and vehicles in high demand, such as SUVs, will have higher residual values than ones with low resale value or vehicles that were heavily discounted when new.
That means they should cost less to lease, though leasing companies often subsidize leases with various incentives to make the monthly payments lower for consumers.
Residual value is not the same as resale value, which is determined by market conditions in the used-car market such as supply and demand, and the overall health of the economy. The resale value can change over the course of a lease.
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