The remaining worth of a lease
“Residual value” is a word that will pop up again and again if you’re looking to lease a car. Your monthly payments aren’t the only thing that a vehicle’s residual value affects. Leasing firms use it to figure out penalties for early lease termination and how much you’d have to spend to buy the car outright when your lease is up.
The definition of residual value should serve as our starting point. The word “residual value” describes an item’s worth following its initial use. Value reduction during the term of a lease is what this term means in the world of leasing.
So, how does it change the amount you pay each month? You pay for the value of the car you use during the lease term when you lease it.
To illustrate, consider a two-year, $18,000 car lease. In order for the leasing firm to know how much of the car you will be utilizing over the lease term, they need to estimate the value of the car in two years. In this case, the “residual value” is relevant. Your monthly payments will be based on the $5,000 you will use over 24 months, giving you an average of $208.3 (plus interest, tax, and fees) if the residual value is expected to be $13,000 at the end of your lease.
What if, in the same time frame, the car’s value is projected to decrease by half? Using $9,000 over the same time period results in a larger monthly payment of $375 (plus fees, taxes, and interest).
You can see that the amount you pay each month for your lease is directly proportional to the residual value; a larger residual value means a lower monthly payment. If you get attached to your leased vehicle and ultimately wish to buy it out, the process is backwards. To continue with the previous example, in the second situation, you pay a lot more to own the car at the conclusion of the lease, but your monthly payments are smaller.
Given the significance of the residual value, how can I choose the right one? At the end of your lease, the decision to buy the car is entirely up to you. A vehicle with a high residual value is an excellent choice if you don’t have a lot of money to put down but still want manageable monthly payments. Strike a balance between manageable monthly payments and a moderate residual value if you intend to buy the automobile at the conclusion of the lease.