You are bombarded every single day via the media by automakers promoting their low monthly car lease payments in order to earn your business. They use very low monthly payments to get you to pay attention, but it’s not all that it seems when you dig a little deeper. My goal here is to explain the car lease residual value, where it comes from and what it means to you when leasing a new vehicle.
Car lease payments are calculated by using several factors, but one of the elements that should concern you is the lease residual value. This number directly affects your monthly lease payment and the amount you will pay to buy your car at the end of the lease if you so desire along with the money factor. The term car lease residual value is the value of a car at the end of the lease term whether it is two, three of five years along with the allotted miles of usage.
When you lease a new car through an automakers finance division and the lease ends you have several options, one of the most common options is to return the car to the dealer or you may purchase the vehicle for lease residual value. In essence you are buying a used car from the lease company. If you don’t buy your returned lease car the automaker will offer the vehicle to the dealer where you returned the car or to any of the other dealers in their network. If none of the dealers want to buy the off-lease car the automaker will send the car through the auction and sell it off at the current market price.
Automakers Set Lease Residual Value
The automaker is the one that determines the lease residual value before you lease your car and that is what the dealer uses to calculate your monthly lease payment. The higher your lease end value the lower your payment. Some automobile manufacturers set a dollar amount and others use a percentage to determine the future value. Below you will find a few examples of calculating the residual value using a percentage.
Examples of Determining the Lease Residual Value
Car Price $20,000 x (55% for 12,000 miles per year) = $11,000 Residual Value
Car Price $20,000 x (53% for 15,000 miles per year) = $10,600 Residual Value
Not all automakers use the percentage formula to come up with a lease end value, others use their own secret formula and print it on their dealer invoice or publish the number online in the dealers portal. Regardless of how they come up with the number they are the ones that have to stand behind it because that is the value that is used on your lease agreement. Regardless of the current market value of the car or truck at the end of the lease term you locked into the lease residual value at the end of the lease period.
If the used car market is up for your leased vehicle at the end it might make sense to buy the vehicle because it would be worth more than you would pay to buy a similar vehicle. However you could also resell the car or you might want to trade it in after you paid the residual value because it would be worth more than the lease end value. However on the other hand if the used car market is down the value would be less and wise thing to do would return the car at the end of the lease term.
By now you should a pretty good idea of what the car lease residual value is and how it affects your decision to lease or purchase a car and what your cost will be at the end on the lease. In many ways a set lease end value helps protect you in the long run when lease a car and avoids car lease mistakes.
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