What is residual value?

The residual value of a leased vehicle is the lessor's estimate of what the vehicle will be worth at the end of your lease term.  Sometimes referred to as the lease-end value, the residual value is an important number to know for a couple of reasons. Your monthly lease payment is based on the difference between the adjusted capitalized cost and the residual value of the vehicle.  For that reason, knowing your residual value is essential in determining your repayment liability. In addition, the residual value represents the minimum you should expect to pay if you elect to exercise your purchase option at lease end (in a closed end lease).  In an open-end lease, the residual value takes on even greater importance.  An open end lease involves an additional payment, the amount of which will depend on the value of the property (residual value) when it is returned. also called finance lease.

Residual values will vary depending upon the particular model you choose, the lessor (i.e. bank, captive finance company or independent leasing company), the amount of miles you anticipate driving, and particular promotions being offered on that model.  In all cases, the lessor,  not the dealer, sets the residual value (although some dealers have been known to shave the residual to earn more money on the deal). So, the best you can do is shop among different lessors for the most competitive number. You can expect variations among values offered by the captive finance companies, independent leasing companies, and banks. One way to shop residuals is to simply quiz the dealer’s finance manager to find out which lenders are offering aggressive residual values along with competitive rates.

Those looking to enter into a closed end lease (most consumers), should shop for the highest residual value possible, because the higher the residual value, the lower the monthly payment will be, all other things being equal.  This occurs because the residual value is subtracted from the adjusted cap cost to arrive at the amount you must repay over the lease term.

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