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Leasing a car may seem attractive because it’s less expensive than a car payment, but there’s more that should go into the decision than just the monthly payment. The residual value of a leased car plays an important role in not only your monthly payment but also what you might owe at the end of the lease.
If you might consider buying out your lease, the residual value plays an even more important role. Here’s what you must know.
What Is Residual Value of a Car?
The residual value of a car is its value at the end of a lease term. During the lease, you pay the car’s depreciation during the time you have it. At the end of the term, the car has a value that the leasing company uses to either sell it to you or someone else should you turn it in.
>> More: Best Lease Buyout Loans
How Is Residual Value in a Car Lease Determined?
A car’s residual value is based on the market price along with the state of the economy, gas prices, and any new technology that’s been released since this car was manufactured. The residual value is often between 50 and 58% of the car’s initial price, but each company and car differs.
Car Lease Residual Value Calculation Example
To understand a car’s residual value, you must know its MSRP and the residual value percentage the leasing company will use.
For example, the MSRP is $40,000, and the leasing company uses a 58% residual value. You would pay $16,800 of the car’s depreciation (plus interest and fees) over the lease term, and the car would be worth $23,200 after the lease term.
>> More: Can You Get Out of a Car Lase Early?
Is a Car Leases Residual Value Negotiable?
Unlike when you buy a car, you can’t negotiate the car’s residual value. Most lease companies stick with the value they stated. The good news is, though, if the lease company offers a lease buyout option, they must disclose the residual value percentage.
This helps you in two ways.
First, you’ll know how much of the car’s depreciation you’d be paying. If it’s a high residual value percentage, you’re paying less of the car’s depreciation. In other words, the car will likely hold its value. If the percentage is low, your lease payments will likely be higher because you’ll bear the brunt of the depreciation costs.
What is Considered a Good Residual Value?
The residual value depends on a car’s reliability and stability but also on the market at the time you lease. Overall, a residual value of over 50% is excellent. It means you’ll pay less than half of the car’s value over a lease period.
That being said, it’s not unheard of to see residual value percentages in the 60% range as well as the 40% range.
Is a high residual value always best?
Not always. If a leasing company overinflates a car’s residual value, it just means if you buy out the lease, you might pay more for the car than it’s worth. Always do your research, using sites like Edmund’s or Kelley Blue Book to see how realistic a residual value is.
Do You Want a High or Low Residual Value on a Car Lease?
Ideally, you want a higher residual value because it means the car holds its value. But make sure that’s the truth first. Do your own research, don’t just assume the leasing company is telling you the facts. They might be stretching the truth a bit to make a profit, and if you don’t know any better, you could invest more into a car than it’s worth.
It’s best to steer clear of a low residual value, though. The lower the value, the more you’ll pay during the lease term. If you don’t buy out the lease, you’ll see nothing for your investment even though you paid most of the car’s depreciation.
How Residual Value Affects Different Kinds of Leases
- Open-Ended Car Leases: If the car you leased is worth less than the residual value set at the time of lease signing, you could be on the hook for the difference. This is why doing your research before leasing a car is so important.
- Closed-End Car Leases: If the car you leased is worth less than the residual value when you signed the lease agreement, you don’t owe the difference. The only ‘extra’ funds you might owe are for any overages you had, such as mileage or excessive damage to the car.
Bottom Line: Residual Value of a Leased Car
Pay close attention to the residual value of a leased car, as it has a large impact on your overall investment in the vehicle. The residual value determines how much of a car’s value you’ll pay over the leased term and how much you must invest if you want to buy out the lease.
Residual values aren’t negotiable but don’t always take them at face value. Do your research and know the market before leasing a car to ensure you’re getting the fair end of the deal.