You need to understand what residual value is in a lease and how it is used for determining your monthly payments. If you are thinking about buying your leased car, the price is the residual value plus any fee.
Read on to find out how lenders assess the residual value of a car and what to consider when making a lease deal.
Read more: Pros and Cons of Taking Over Car Lease Payments
What Is a Lease, and How Does It Work?
Even though a majority of people buy the car they drive, others prefer to lease. A vehicle lease is an agreement in which a dealership gives a customer temporary ownership of a car for a pre-set amount of time and money. If the customer fails to meet the conditions agreed on in the lease contract, they will have to pay additional charges when the lease ends.
Vehicles are usually leased for business or personal use or as long-term test drives by people who want to find the perfect vehicle for their family. Once the lease is up, they can return the vehicle or purchase it. Purchasing a leased vehicle is called a lease buyout. Knowing your lease residual and what it means can help to decide if a lease buyout is right for you.
What Is a Residual Value?
The residual value of a leased vehicle is an estimation of how much the car is worth once the lease contract has ended. This value is also the amount you can buy a car for when the lease contract is up.
The residual value helps to determine what your monthly lease payment will be. Your lease payment is the depreciation, split over the lease period, with fees and interest included. A residual percentage is provided when you sign a car lease agreement to calculate the car value at the end. It is something you can negotiate as part of your lease contract.
What Do You Need to Know About the Residual Value of a Lease?
- The residual value affects your monthly payment. A higher residual value means a higher monthly payment.
- The residual value does not remain constant. It changes every month and year.
- All lease vehicles lose value over time.
- Residual value is determined by the lending company that issues the lease contracts.
- Older vehicle models and consumer trends can affect the residual value of a car.
Lease Equity
When your leased vehicle is worth more at the end of the lease than the buyout residual value estimated provided when you signed the agreement, it is referred to as lease equity. Lease equity is usually attributed to driving fewer miles as compared to your lease limits, keeping the vehicle in excellent condition, and high market demand for your vehicle model.
Is It Possible to Negotiate a Car’s Residual Value?
If a lease buyout is an option, the lease company must disclose the residual value of the vehicle at the time of the lease. However, chances are you may not be able to negotiate it like you can negotiate other lease terms.
Still, residual value is something you should keep in mind when considering the terms of the lease, and you can shop around to know more about it. A higher residual value means the car is expected to retain its value well over the lease term. Remember, most of your lease payment covers the cost of depreciation so less deprecation or higher residual value can lead to lower monthly payments during the lease term.
It is also important to note that if the residual value is set higher than what the car will be really worth by the time the contract ends, you could end up overpaying for the vehicle if you plan to buy the vehicle.
Read more: How Much Does It Cost to Lease a Car?
You must check out vehicles with the best residual value before signing a lease. Visit eAutoLease.com to find out the best car deals for your budget. With comprehensive information about a car’s residual value, you can make a wise decision. You can go through all available vehicles by their type, body style, manufacturer, as well as model year and find exactly what you need.
