Whether your are in the market to lease a vehicle or you already lease a car, truck, or SUV, you will likely read or otherwise have heard the term ?residual value?.? Perhaps you never considered it, but? maybe your wondering what residual value means?? Residual value refers to the value of something after it has been used for some time, and in context of an automotive lease it refers to the depreciation of the vehicle?s value over the term of the lease.
Another thing that many people don?t realize is that residual value not only affects your monthly payments, but it is also used by leasing companies to determine any penalties against you should you decide to end your lease early. ?It is also used to determine how much you would have to pay if you decided to buy the vehicle at the end of your lease.
How residual value affects your automotive lease payment
The best way to understand the concept is to realize that when you lease a car you pay for the car?s value that you use over the lease length.? Here?s an example.
Suppose you leased a $27,000 car for 2 years. The leasing company needs to estimate the value of this car in two years time in order to know how much of the car you will be using during your lease term. That?s where the ?residual value? comes into the equation. If the residual value is estimated to be $13,000 at the end of your lease, then your monthly payments will be calculated on the $5,000 you will use over 24 months, giving an average monthly payment of $208.3 (plus interest, tax and fees).
What if the car is expected to lose half its value over the same period?
In this scenario, you will be using $9,000 over the same period, leaving you with a higher monthly payment of $375 (plus interest, tax and fees).
As you can see, residual values are a key factor in determining how much money you will be obligated to pay on your lease.?? The higher the residual value, the lower your monthly fees. However, this works just the opposite way if you build a bond with your car and decide to purchase it at the end of your lease. If we stick with the same example above, the lower monthly payments in the second scenario comes at the cost of paying substantially more to buy your car at the end of the lease.
Since the residual value is so important, how do you know which one is best for you? The answer to that question depends upon whether you want to purchase the car at the end of your lease or not. If you don?t want to make a large down payment and you want low monthly payments, then a car that holds with a higher residual value is your best option. If you are thinking of purchasing the car at the expiration of the lease, then you need to balance low-monthly payments with a moderate residual value.
Source: http://waukeshaautomotiverepair.com/2011/how-residual-value-affects-your-automotive-lease-payment/
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