​BASICS OF CAR LEASES - PART 4 - HOW THE RESIDUAL VALUE OF YOUR CAR AFFECTS YOUR LEASE PAYMENT

The Residual Value of Your Car

Residual value of your car

To recap from a previous post, the residual value is the portion of the car that you do not pay for in a lease. The heaviest depreciation period for a brand new vehicle occurs in the first 3 or 4 years of its life. When you lease a car, by definition, you pay for that depreciation. If the residual value of a Toyota is 60% for a 36 month/36,000 mile lease, then Toyota is predicting that car will still have 60% of its value 36 months down the road. The inference then is that you only pay for—at most—40% of the car’s value over 3 years.

The residual value, thanks to the truth in lending act, cannot be altered by a dealership and is a huge determinant of whether a lease is “good” or not. The higher the residual value, the smaller chunk of the car you have to pay for. Last summer, for example, Toyota Tacoma TRD Off-Roads had a residual value of over 70%. On a $40,000 truck, the lease payments were based on at most 30% of the MSRP (100%-70%=30%), or $12,000. Compare that to a $40,000 Nissan Murano which had a residual value of just 44%. Over 36 months, you would pay for 56% of the car, or $18,400! Divide each of those numbers by 36 for each month in the term, and you can quickly see the importance of a low residual value! The Murano, though the exact same MSRP as the Tacoma TRD, would cost nearly $180 more each month to lease based on the residual value alone. 

Using the residual value is a good way of judging how much a car will cost you on a monthly basis because you know roughly the depreciation. If the MSRP is $50,000 and the residual value is 50%, you know the car will have a predicted value of $25,000 at the end of the lease. No matter the discount you get on the car, the residual value will always be $25,000. Your lease is calculated by subtracting the residual value from the value you and the dealership have agreed to for the car (the discount you’ve negotiated), and then dividing that by the number of months in the lease term. There is also interest, taxes, title, registration, dealer documentation and other miscellaneous fees in addition to this. 

The best lease will result from a high residual value, a low money factor, the most incentives and rebates, and negotiating the biggest discount on the vehicle. Achieve all 4 for a killer lease deal!