How residual value can help you lease a better car for less
How Residual Value Can Help You Lease a Better Car for Less
If you're considering leasing a car, one of the most important factors to understand is its residual value. The residual value is the estimated worth of the vehicle at the end of the lease term, expressed as a percentage of its original price. For example, if a car that costs $30,000 has a residual value of 50% after three years, it means that it is expected to be worth $15,000 when the lease ends. This value affects how much you pay every month, as well as any fees or penalties you may face if you return the car before or after the agreed upon time.
In this article, we'll explore why residual value matters and how you can use it to get a better deal on your next leased car.
Why Residual Value Matters
The residual value of a car is not simply a number that someone guesses. It is based on various factors that affect the demand and supply of the vehicle, such as its brand, model, age, mileage, condition, features, and market trends. A car that is expected to hold its value well (i.e., have a high residual value) is usually one that is popular, reliable, fuel-efficient, and has a strong resale market. Conversely, a car that is likely to depreciate quickly (i.e., have a low residual value) is often one that is less desirable, outdated, inefficient, or has a poor reputation.
The residual value of a car can affect your lease in several ways:
- Lower residual value means higher monthly payments: When you lease a car, you essentially pay for the depreciation of the vehicle during the lease term, plus interest and fees. The higher the residual value, the lower the depreciation, and thus the lower the monthly payments. For example, if you lease a $30,000 car for three years with a residual value of 50%, you would pay $15,000 divided by 36 months, or $416.67 per month (assuming no money down and no taxes). However, if the residual value were only 40%, you would pay $18,000 divided by 36 months, or $500 per month. That's a difference of $83.33 per month, or $2,999.88 over the entire lease term.
- Higher residual value means lower risk of negative equity: When you lease a car, you agree to return it at the end of the term, usually with a certain mileage limit and in good condition, or pay penalties. If the residual value is accurate, you should not owe any extra money beyond the lease payments. However, if the car's actual value is less than the residual value (e.g., due to excessive wear and tear, or market changes), you may face negative equity, which means you owe more than the car is worth. This can happen if the residual value is set too high. For example, if you lease a $30,000 car for three years with a residual value of 60%, but the car is only worth $20,000 when you return it, you would owe $10,000 in negative equity. This can be a big financial burden, especially if you want to lease another car or buy one.
- Higher residual value can mean better lease-end options: When you lease a car, you may have several options at the end of the term, such as:
+ Buying the car for the residual value
+ Returning the car and leasing another one
+ Returning the car and walking away
If the residual value is high and the car is in good condition, you may be able to buy it for less than its current market value, since you only have to pay the residual value plus any fees (such as a disposition fee and a purchase option fee). This can be a good deal if you like the car and want to keep it for longer. On the other hand, if the residual value is low or the car is damaged, you may not want to buy it, and returning it and leasing another one may be a better option. By knowing the residual value in advance, you can plan your options accordingly and avoid surprises.
How to Use Residual Value to Get a Better Deal
Now that you know why residual value matters, let's see how you can use it to your advantage when leasing a car.
1. Research the residual value of the cars you're interested in: Before you start negotiating with a dealer or a leasing company, find out what the residual value of the cars you want to lease is. You can do this by checking online resources such as Edmunds, Kelley Blue Book, or TrueCar, or by asking the dealer or the leasing company directly. Make sure you compare the residual value of similar cars (same make, model, trim, options, etc.), as it can vary widely.
2. Look for cars with higher residual values: If you want to pay less per month and reduce the risk of negative equity, focus on cars that have higher residual values. These are usually cars that are popular, reliable, fuel-efficient, and have a strong resale market. However, don't forget to consider other factors such as the purchase price, the interest rate, the fees, the mileage limit, and the lease term, as they all affect the total cost of the lease.
3. Negotiate the residual value if possible: Some dealers or leasing companies may be willing to adjust the residual value if you ask for it. For example, if you plan to keep the car for longer than the lease term, you may want to negotiate a higher residual value, since it will lower the buyout price. Conversely, if you plan to return the car at the end of the term, you may want to negotiate a lower residual value, since it will lower the monthly payments. However, keep in mind that the residual value is based on factors that are beyond your control, and that the dealer or the leasing company may not agree to change it.
4. Keep the car in good condition: To avoid penalties and negative equity, make sure you take good care of the car during the lease term. This includes:
+ Following the recommended maintenance schedule
+ Keeping the car clean inside and outside
+ Avoiding excessive wear and tear
+ Staying within the mileage limit
+ Fixing any damages before returning the car
By doing so, you can maximize the residual value and increase your chances of a smooth lease-end process.
Conclusion
Residual value is a crucial aspect of leasing a car that can affect your monthly payments, your risk of negative equity, and your lease-end options. By understanding how residual value works and how to use it to your advantage, you can get a better deal on your next leased car and avoid costly mistakes. Remember to research the residual value of the cars you're interested in, look for cars with higher residual values, negotiate the residual value if possible, and keep the car in good condition. With these tips, you can drive away with a smile and keep more money in your pocket.