What Is the Difference Between Residual Amount & Payoff Amount?

Financing and leasing options can be voluminous when shopping for an automobile. Automobile dealers often refer to payoff and residual amounts when discussing leasing options. A payoff amount can also refer to vehicle financing.

Mechanics of Leasing

When you lease a car, you agree to pay a specified amount over a set period of months to use the vehicle. The process begins similarly to a traditional purchase; you agree upon a purchase price. A lease payment and term is then agreed upon and the lease contract is signed.

Residual Price

At the end of the lease term, the vehicle may be returned to the dealer or purchased for a specific guaranteed price known as the residual value. This value is the projected wholesale value of the car at the end of the lease term.

Payoff Amount

The payoff amount is how much it will cost you to terminate your lease and purchase the vehicle before the end of the lease term. You must ask your leasing company to provide you with a payoff value; an early payoff amount can be difficult to calculate, as it is based on both the residual value and the amount you still owe on your lease. The leasing company will recalculate your lease balance, attributing most of your payments to finance charges rather than paying down the lease.

In traditional financing arrangements, the balance due on the installment contract is also considered the payoff amount. Unlike leasing arrangements, this payoff amount can be calculated as the principal balance remaining plus any accrued interest charges.

Determining the Lease Payment

A lease payment is made up of three components: a finance fee, a sales tax fee and a depreciation fee. The finance fee is similar to an interest charge in a traditional financing transaction. The sales tax fee covers any sales tax that is charged by the state.

The depreciation fee is the portion of the payment that pays for the loss in the car's value over the number of months it is used. Divide the original cost of the vehicle less the residual value by the term length to determine the monthly depreciation charge.