Residual Value? What does it mean?
The Residual Value is the resale value of the car at the end of your lease. The residual is not determined by your car dealer, but can have an enormous impact on your lease payment. Residual values are used by banks to determine the risks, money factors and costs of car loans and leases. The value is determined by Lenders or Lessor because they are the ones who stand to either make or risk the money for leasing the car. Banks may lose money on car leases if the residual value is higher than what they are able to sell the car for. There are automobile research companies, working on behalf of lenders who publish the residual values of every car model for every year. You can see that keeping a database of accurate residual values would be an enormous task. Residual value is stated as a percentage of the car’s original MSRP. For example: If a 2009 Subaru Legacy with an MSRP of $24,000 was estimated to be worth $16,000 after 3 years, the car’s 3-year residual value would be listed as .60 or 60% ($14,400/$24,000)
Is it Better to have a Higher or Lower Residual Value?
Your monthly lease payment, in part, is calculated by taking your vehicles capitalized cost (the price you agreed to pay for the car) and subtracting it from your cars estimated resale value. The difference is the deprecation portion of your lease payment. In the case of the Subaru example above, your depreciation cost would be $96,00 or ($24,000 – $14,400). As you can guess, a higher residual value will lower your depreciation costs which in-turn will lower your monthly payments. There are a few other considerations. A resale value that is too high can make it more difficult to get out of a car lease early or negotiating a trade-in with your dealer. By using my free, advanced car lease evaluator you can quickly and easily see how the residual effects the monthly car payment and value of deal that you are getting on the car lease.
Can you Negotiate Residual with your Dealer?
While the residual value is not a fixed number like the MSRP, it cannot be changed by the dealer. Residual values are financial considerations which can only be tweaked by the bank who is lending the money. Indirectly, residual values can be considered somewhat negotiable since it is in the dealers best interest to shop for the financial terms that will help them make the sale. In some cases, that may mean finding a back who is willing to be a little more aggressive with your car’s estimated residual value.
The lease ratings on carleasetips.com are much simpler and don’t even include the residual in the formula. In other words, you don’t really need to bother knowing your residual value to see if you are getting a good deal. Follow the rankings each month and use the free lease evaluator.