The residual value of leasing

If you are looking to lease a vehicle, you will find yourself hearing the term “residual value” repeatedly like a leitmotif.

A residual value will not only affect your monthly payments, but is also used by leasing companies to ascertain any penalties if you decide to leave your lease early and will determine the cost if you decide to buy the vehicle when your lease ends.

Initially lets look at the meaning of residual value. 

The phrase “residual value”, refers to the value of an object after it has been used for an amount of time.

In leasing jargon, this refers to the depreciation of the vehicle’s value over the term of the lease.

So how will this affect your monthly payments?

When leasing a car, you only pay for the car’s value that you use over the duration of your lease.

For example if you leased an $18,000 car over 2 years: the leasing company would be required to estimate the value of this car in two years time in order to find out how much of the car you will be using during your lease term.

This is where the term “residual value” factors into the equation.

If the residual value is predicted to be £13,000 at the end of your cheap new car lease then your monthly payments would be be computed on the £5,000 you will use over 24 months, giving an average monthly payment of £208.3 (plus interest, tax and fees).
 
What if however the car is foreseen to lose half its value over the same timespan?

In this scenario, you would use $9,000 over the same time frame, leaving you with a higher monthly payment of $375 (excluding interest, taxes and fees).

From the information given you can see , residual values are an important element in determining how much money you pay on your lease and therefore the higher the residual value, the lower your monthly fees would be.  Discover car leasing and you will not be dissapointed.

This also works in reverse if you decide to purchase your car when your lease comes to an end. Using the previous example, the lower monthly payments in the second scenario would mean you pay considerably more to buy your car when your lease expires.

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Since residual value is so important how do you decide which is the right avenue for you to take? It solely depends on whether you want to purchase the car at the end of your lease or not.

If you don’t want to make a large deposit payment and you require low monthly payments, then a car that has a higher residual value would be the deal that would most benefit yourself.
 If you are considering purchasing the car when your lease ends, then you need to balance low-monthly payments alongside a moderate residual value.