If cars maintain their value well, lenders can offer lower payments that will make those models more popular. A high residual value can boost sales on a slow-selling model. (More on this later.)Īutomakers love high residual values. What lenders come up with depends on their own interpretation of available data, their risk tolerance and their leasing goals for the given vehicle. This lists each vehicle’s predicted wholesale value after 2, 3, 4 and 5 years. Most banks base their numbers on the annual Residual Percentage Guide published by the Automotive Lease Guide (ALG). It’s typically set by the bank financing the lease, not the car dealer. They’re highly calculated guesses, based on factors like expected depreciation, past and current demand for that brand and model, expected effects of mileage, and predicted market conditions like the price of gasoline. Residual values, though they have a very real effect on your car payments, are actually just guesses, not absolute values. According to Sergio Stiberman, CEO of, a high residual value “gets you 80% of the way to a good deal.” Who decides the residual value of a car? Divide that by 36 months and it will put your monthly payments (before taxes and fees) at just shy of $278 per month.īut if its residual value is only 40% (worth $10,000 after three years), your base monthly payment will be $15,000 divided by 36: almost $417 per month.Īs you can see, it’s a big difference. That will put it at $15,000 after three years. Let’s say you see that our $25,000 car has a residual value of 60%. (That’s the Manufacturer’s Suggested Retail Price, a guideline set by the manufacturers, not its actual selling price.) Residual value is shown as a dollar value but it’s calculated as a percentage of the car’s MSRP. The higher the residual value – meaning less of a difference between the car’s price now and its predicted value at the end of your lease term – the lower the monthly payments.Ī low residual value means more of a difference that you will have to cover as the lease holder. Residual value is one of the most important factors in determining your monthly payments on a car lease. How residual value affects monthly lease payments (Plus taxes, fees and interest.) But if its residual value is only $10,000, you’ll have to cover $15,000 over those three years. Looking again at that $25,000 car: if its residual value is $15,000, you’ll have to pay a total of $10,000 over the time you’re leasing it. That gives it a residual value of $15,000, if you lease it for that period.Īs a car leaser, what your payments have to cover is essentially the vehicle’s loss in value ( depreciation) while you have it. So a car that was worth $25,000 new, in three years might sell for $15,000. Mileage takes its toll and this year’s model makes old ones obsolete. It’s also called lease-end value or lease-end buyout price.Ĭars lose value from the moment they first roll out of the dealer’s lot. Residual value means the estimated price of the car at the end of the lease period. I’ll clarify what it means, how it’s calculated, and – what really matters – how it affects your monthly lease payments. In this article, I want to explain one of the most important factors behind the monthly rate you pay on a lease car: residual value. When you’re going to negotiate a car lease, the more you know the terminology, the better a deal you can cut. Fees, rates, values and unexplained percentages all add up. Just for lack of understanding, many people leasing a car for the first time end up stuck in a contract where they’re paying much more than they wanted to. The process of leasing a car can turn into a baffling journey through a maze of obscure terms and numbers.
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