Why residual value matters when choosing a leased vehicle
Lower Monthly Payments
The residual value of a car is used to calculate the lease payments. The higher the residual value, the lower the monthly lease payments. This is because leasing companies expect the car to retain its value at the end of the lease term, and therefore, they don't need to charge as much each month to recover the cost of the vehicle. On the other hand, if the residual value is low, the monthly payments will be higher because the leasing company needs to recover more of the cost of the car each month.
For example, let's say you are considering leasing two cars, Car A and Car B. Car A has a residual value of $20,000, and Car B has a residual value of $15,000. Both cars have a lease term of 36 months and a money factor (interest rate) of 0.0025. The lease payment for Car A would be $555 per month, and the lease payment for Car B would be $648 per month. As you can see, the higher residual value of Car A results in lower monthly payments.
Lower Total Lease Cost
In addition to lower monthly payments, a higher residual value can also result in a lower total lease cost. This is because the leasing company expects the car to retain its value, which means that the company can potentially sell the car for more money at the end of the lease term. If the car sells for more than the residual value, the leasing company can use that extra money to reduce the cost of the lease.
For example, let's say you lease a car that has a residual value of $20,000. At the end of the lease term, the car is worth $22,000. The leasing company can sell the car for $2,000 more than the residual value, which means that the total cost of the lease is $2,000 less than expected. This is called a lease-end gain, and it can result in lower payments or even a refund to the lessee.
Residual value can also affect the cost of buying the car at the end of the lease term. If the residual value is low, it may not be worth buying the car at the end of the lease because the purchase price will be higher than the car's actual value. On the other hand, if the residual value is high, the purchase price may be lower than the car's actual value, making it a good deal to buy the car at the end of the lease.
Factors That Affect Residual Value
There are many factors that can affect the residual value of a car. One of the most important is the car's brand and model. Some brands and models hold their value better than others, which means that their residual values are higher. For example, luxury brands like BMW and Mercedes-Benz typically have higher residual values than mainstream brands like Toyota and Honda.
Another factor that affects residual value is the car's condition. The better the condition of the car at the end of the lease term, the higher the residual value will be. This is why it's important to take good care of the car during the lease term and to make any necessary repairs.
The length of the lease term can also affect the residual value. Generally, the shorter the lease term, the higher the residual value will be. This is because the car will be worth more at the end of a shorter lease term than it would be at the end of a longer lease term.
Other factors that can affect residual value include the car's mileage, options and features, and the economic conditions at the end of the lease term.
Conclusion
When choosing a leased vehicle, it's important to consider the residual value of the car. The residual value can have a significant impact on the monthly lease payments, as well as the overall cost of the lease. A higher residual value can result in lower monthly payments and a lower total lease cost. Factors that affect residual value include the car's brand and model, condition, lease term, mileage, options and features, and economic conditions. By considering all of these factors, you can choose a leased vehicle that has a high residual value and is the best value for your needs.