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Residual value is the projected remaining value of your vehicle after your lease ends. Leasing companies calculate residual value up front and use that information to determine your lease payments and how much it would cost to purchase the car when the lease is up.
If you’re new to leasing, knowing what residual value means will help you choose the car lease that best fits your needs. It can also help you figure out whether you want to buy the car after the lease ends.
We’ll go over the meaning of residual value, how to find it, and what a good residual value might be for your lease.
In a car lease, residual value is the estimated value of the vehicle at lease end. That’s the price you’d pay (plus fees) if you wanted to purchase your leased vehicle. It’s typically lower than the car’s original purchase price because the vehicle goes down in value as you drive it.
Leasing companies calculate the residual value up front, so you know what it is before you sign the contract. You can find this figure in your lease agreement (it might also be called “purchase option price”). A leased vehicle’s residual value is calculated based on several different variables, but once it’s set, it doesn’t change. A high residual value means the company expects the car to hold its value during the lease, while a low value means they think it will depreciate quickly.
Residual value is a pre-determined figure based on factors such as:
Residual value affects not only your lease-end options, but your monthly payment, too.
A lease payment is based on the expected depreciation of the car plus financing costs (called “money factor” in leasing language). Therefore, a leased car that is expected to retain its value will have a higher residual value and lower lease payments.
If the dealer thinks the car will depreciate more quickly, your lease payments will be higher and the residual value lower.
When the lease comes to its end, the residual value determines the lease buyout price: how much it will cost to purchase the car, not including mileage overage costs or fees the dealer charges (such as documentation fees). It’s the price of the car minus the depreciation you’ve paid toward during the lease.
If you wanted to purchase the vehicle at the end of the lease but don’t have the cash on hand, understanding lease buyout loans can help you figure out the best way to finance the car.
There is a simple formula you can use to calculate the residual value of a leased vehicle. It’s based on the original retail value of the car and how much it’s expected to decline in value during your lease.
The residual value percentage is typically between 50% and 60%, meaning the residual value would be around half of the MSRP. The residual value percentage varies depending on the lease terms and other factors. Leasing companies use industry data to accurately estimate the expected depreciation of a particular vehicle and set the residual percentage.
So, if you have a $50,000 car and the leasing company has set a 50% residual percentage, the residual value would be $25,000. In other words, you’d multiply $50,000 by 50%.
When you know your lease’s residual value, it makes it so much easier to decide whether to turn in the vehicle or buy it out when the lease is up. A lease buyout can be a smart move, especially if the residual value is lower than the current market value. In that case, you’d be paying less than the car is worth — buying it at a bargain price.
RefiJet offers lease buyout services that can help you buy out your lease with payments that fit your budget. You can also explore auto refinancing options that make your car loan more affordable. No matter what you decide, RefiJet is here to help you make the right choice for your needs.
Below are some frequently asked questions about residual value.
Residual value in a car lease is the estimated value of the car at the end of the lease. It accounts for depreciation over the lease term and shows how much it would cost to buy the car, not counting fees and other charges.
For leased vehicles, the residual value formula is the MSRP multiplied by the residual value percentage, which is set by the financing or leasing company. So if the MSRP is $50,000 and the residual percentage is 50%, you’d multiply them together and get $25,000 as the residual value of the car.
The MSRP represents the original value of the vehicle before the lease, while the residual percentage represents the expected depreciation over the lease term. Multiply the MSRP (not the purchase price or current market value) by the residual percentage to find the residual value.
No. Market value is what the car would be worth if you sold it today in a private sale, while the trade-in value is what a dealer would give if you traded it in. Residual value can be higher or lower than either of those values, since it’s determined at the beginning of the lease, not the end.
A good residual percentage for a lease would be 60% or higher, indicating the car is expected to retain its value well. The higher the residual percentage, the lower the depreciation is expected to be.
Learn what residual value means, how it is set on a car lease, and why it matters when deciding to buy out your lease at the end.
