The "Residual Value" of Leasing
When you lease a vehicle, you might hear the term residual value mentioned by the salesperson. What is residual value? And what effect does it have on your lease payment?
The residual value is the amount you can buy the car for at the end of the lease, if you decide you want to purchase the car. It also is an important number in the lease equation, directly affecting your monthly payment. So, where do they get the residual value? And what does it mean?
Let's start with a simple definition of residual value. In fact, let's just look at the word residual. Residual means the part that is left after some of it has been taken away.
OK, so how does this apply to leasing? Well, when you lease a car, you pay for that portion of the car's value that you use. In other words, let's say you leased a $20,000 car for three years, and it was worth $10,000 at the end of the lease. In this scenario, you've used $10,000 worth of the car's value, or 50 percent of the car's original price. Your payments would be $10,000 divided into 36 monthly payments of $277 (plus interest, tax and related fees).
Now, let's stick with that same example. What if the car you had decided to lease didn't lose 50 percent of its value over three years? Instead, it lost only 35 percent of its value. Then, your $20,000 car would only have lost $7,000 of its value. Your monthly payments would be $194 (plus interest, tax and fees).
You can see from these two examples that the residual value has resulted in a much lower monthly payment. And when you're leasing, monthly payment is where it's at. Right?
When you lease a vehicle, you might hear the term residual value mentioned by the salesperson. What is residual value? And what effect does it have on your lease payment?
The residual value is the amount you can buy the car for at the end of the lease, if you decide you want to purchase the car. It also is an important number in the lease equation, directly affecting your monthly payment. So, where do they get the residual value? And what does it mean?
Let's start with a simple definition of residual value. In fact, let's just look at the word residual. Residual means the part that is left after some of it has been taken away.
OK, so how does this apply to leasing? Well, when you lease a car, you pay for that portion of the car's value that you use. In other words, let's say you leased a $20,000 car for three years, and it was worth $10,000 at the end of the lease. In this scenario, you've used $10,000 worth of the car's value, or 50 percent of the car's original price. Your payments would be $10,000 divided into 36 monthly payments of $277 (plus interest, tax and related fees).
Now, let's stick with that same example. What if the car you had decided to lease didn't lose 50 percent of its value over three years? Instead, it lost only 35 percent of its value. Then, your $20,000 car would only have lost $7,000 of its value. Your monthly payments would be $194 (plus interest, tax and fees).
You can see from these two examples that the residual value has resulted in a much lower monthly payment. And when you're leasing, monthly payment is where it's at. Right?