The residual value is the approximate value of a leased vehicle at the end of the lease period, which is often 36 months. The longer the term of the lease, the less residual value the vehicle will have. The residual value is based on the expected depreciation amount of a vehicle.
Meaning
The residual value is the amount you would pay for the vehicle at the end of the lease term if you decide to purchase it. The final amount is predetermined at the time the lease is executed and will not change. Generally, the higher the residual value of the vehicle, the lower the lease payments will be.
Importance
Residual value is considered the most important of the four factors that are used to calculate your payment, which also include the price of the vehicle, the length of the lease term and the money factor, meaning what you can afford. This is why when shopping for a lease, it often best to compare residual values offered by different financial institutions.
Calculation
Residual values are determined by the financial institutions that provide you with the lease agreement by taking into consideration factors such as the model of the vehicle and how much they estimate it will be worth at the end of the lease based on the model's history. The residual value is typically non-negotiable.
Example
Suppose you lease a $25,000 car for three years, with a 50 percent residual value. Since you would only be using 50 percent of the car's total value, your monthly payment (not including taxes, fees or interest) would be $347.22 (12,500 divided by 36 months). If you leased the car for four years and the residual value was 60 percent, you would have used 40 percent of the car's value, so your monthly payment would be $277.78 (10,000 divided by 36 months).
Best Value
As a general rule, luxury cars have a better residual value than other types of vehicles because they tend to depreciate more slowly, meaning that you will have used less of the vehicle's value during the lease, which can help to keep the payments lower. To find the residual value of a car you may be interested in leasing, visit https://www.alg.com/.
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