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What Is Residual Value On A Car Lease?
As time passes during your lease the value of your vehicle will change, usually according to depreciation and the current conditions of the car market. After your terms have expired, you'll be left with the car's residual value. The residual value of a car is an estimation of the resale value it will have at the end of your lease terms.
This value determines your monthly lease payments and how much your lease buyout may end up being.
Many factors affect your vehicle's residual value, ranging from the car's total mileage to overall maintenance. The final number will be determined by both the rate set by your dealership and the treatment the vehicle receives during your terms.
What Factors Affect the Residual Value of a Car?
For the most part the residual value of your leased car will slowly decrease over time, but that's not always the case. There are a variety of factors that can impact your car's residual value, including:
- Year the Car Was Manufactured: Vehicles that were manufactured more recently tend to carry a higher residual value than older cars, with the exception of those deemed classic or antique. The reason an older car has less residual value is usually due to the cost of repairs; as the model ages, the available parts become more difficult to get, and therefore more expensive.
- Current Condition of the Vehicle: One of the most influential factors in defining a car's residual value is what category of condition it falls within. Vehicles usually fall within one of four condition categories:
- Excellent: A car in excellent condition will lack any appearance of scratching or rust on the exterior, have perfect mechanical function, and require zero repairs upon purchase. The internal components should be clean and contain no fluid leaks or flaws. The interior should be clean as well, with no damage to the car's upholstery or inlay. The car should also have a clean title history and clear record of service.
- Good: A vehicle that falls into the "good" category will have no significant issues with its internal mechanics; any issues that do exist should not be costly to repair. There should be no major body damage, few issues with the interior, and little to no rust. Like an "excellent" car, a "good" car should have a clean title.
- Fair: A car in fair condition likely has some issues with its internal mechanics, possibly with major components like the engine. It will also have visual flaws, including chipped paint, small tears in the interior, and some evidence of rust. For a car to stay out of the "poor" category, any issues with the car must be possible to repair, and the vehicle needs to be operational.
- Poor: A far wider category, cars in poor condition vary wildly in value. These vehicles usually need to be appraised by an automotive professional, and tend to have a series of issues. Cars in the "poor" category may have a salvage or flood title, severe mechanical issues, or unknown mileage. Poor cars can also have significant rusting and issues with operation.
- Color of the Car's Paint: Certain body paint colors can increase or decrease a car's residual value due to popularity and perceived resale ability. More valuable colors include silver, white, and black, while less valuable colors tend to be anything gaudy or unusual.
- The Vehicle's Brand: Cars from more reputable manufacturing brands tend to hold their value longer; if your vehicle is made by a well-known company with a good reputation, the higher the likelihood you can easily find a buyer.
- Current Mileage of the Car: Much like a car's age, the mileage of a vehicle is a good indicator of how much wear-and-tear it has experienced over its lifetime. Mileage is often even more important than a car's manufacturing year; older vehicles that haven't been driven extensively tend to be in better condition, and therefore have a higher residual value.
- How Well the Vehicle Has Been Maintained: For a car to hold the maximum amount of value, it needs to be serviced on a regular basis. If routine maintenance is not kept up, issues within the vehicle can degrade its ability to operate. If a car isn't fully operational, it isn't likely to get into the "good" or "excellent" categories necessary to attain the highest value.
What is the Residual Value of a Leased Vehicle?
If you want to determine the residual value of your leased vehicle, you'll want to find the original value and subtract it from the depreciated value. The way to do this is to either check your lease paperwork for the initial value or find it using GoodCar VIN Decoder, then check the current value of the car. You can also hop over to GoodCar and use the Residual Value Calculator to find out the current value of your vehicle.
You may also have to take the manufacturer suggested retail price, or MSRP, and apply the residual value percentage rate set by your leasing company. Most of the time the dealership or finance company you have the lease with will calculate this number for you.
Dealerships set residual values and unlike lease terms, aren't up for negotiation. Once the residual value is calculated many dealerships will offer you the opportunity to buy the car for that amount; if not, you can return the car and start a new lease for a different vehicle. Most dealerships use the same data that GoodCar has access to, therefore you can get an insider's view of the details before working with the dealership.
Residual Value Frequently Asked Questions
Is Residual Value Calculated from MSRP or Sale Price?
Residual value is usually calculated as a percentage of the cars original manufacturer's suggested retail price; this means that even if you get a lower price for your lease during term negotiations, that original MSRP still factors in when calculating the final residual value.
How is the Residual Value Calculated?
The easiest way to calculate residual value is to either combine the residual value rate and MSRP of your leased car, or subtract the initial value from the depreciated value. Most of the time your dealership will calculate this number for you, and since it isn't negotiable, you don't need to concern yourself too much with finding the exact amount of your own. But if you are curious, you can use GoodCar's residual value calculator to figure it out on your own.
What if My Car is Worth More Than the Residual Value?
If the vehicle market is hot, it's possible your vehicle will increase in value throughout the course of your lease. In this case, you can use the positive market conditions to help you negotiate better end of lease terms. This can mean a reduction of fees related to mileage, maintenance, wear-and-tear, or any other components of your original agreement.
Is Residual Value the Same as Payoff?
While the residual value and the payoff amount are similar, they are not the exact same. The payoff is a number set by the dealer or lease company that gives you the ability to buy the car before your lease has expired. You can calculate your payoff amount by taking the residual value listed in your agreement and adding the amount of money you would still owe for the remainder of your lease.
Can You Negotiate the Residual Value of a Car Lease?
Unfortunately, the residual value of your leased car is rarely up for negotiation. This means that the buyout price offered by your dealership is their bottom line for selling you the car after your lease is up. Residual values are often defined at the beginning of a lease during the establishment of terms; if you don't believe the price is fair, don't sign the paperwork and search elsewhere for a vehicle.
What Is a Good Residual Value?
A good residual value is defined by how low your residual value rate is. If you can get a rate below 65%, that would be considered above-average; below 500% would be an excellent deal. The lower your rate is, the higher your residual value will be at the end of your lease.
What is the Residual Value on a Car Lease?
The residual value on a car lease is the estimated resale value the vehicle will have once lease terms have expired. Elevated vehicle market conditions, what terms have been negotiated, and the condition of the vehicle are all factors in determining what the value will be.
Where Can I Get More Information About My Leased Vehicle?
Whether you are currently leasing, considering getting a new lease, or trying to buy a car after the terms of your agreement has expired, you need to make sure you research your vehicle. Vehicle history reports are a great way to learn all the essential information about your car; with a high-quality vehicle history report, you can have all the data you need to negotiate better lease terms and determine the correct residual value of your car.
Vehicle history reports can give you important details like:
- Title Records
- Junk/Salvage Records
- Insurer "Total Loss" Records
- Sales History
- Problem Checks
- Auto Specs
- Location History
- NHTSA Crash Test Ratings
- NHTSA Recalls
- Awards and Accolades
- Manufacturer Information
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