Does Residual Value Matter when Leasing a Vehicle?

Should you be concerned about the residual value of the vehicle when you’re leasing? This question comes with some complicated answers.

There are several factors involved in the payments that you make during your lease term, as well as factors that impact the overall price you will pay if you choose the purchase your vehicle at the end of the lease. Let’s explore some of these items and see how much this value matters to you if you think you’re going to want to lease your next ride.

Isn’t the Lease Payment the depreciation split into the Months?

Technically, and in the most simple terms, the lease payment you’ll be responsible for during your lease term is the depreciation value plus fees and interest. Because you’re not paying for the actual value of the car, you pay a lot less for a lease than when you purchase a vehicle outright. If you’re going to lease your next vehicle, and then the next one after that, should you be at all concerned with the residual value of the vehicle? The answer to this question is “yes.”

Why Should You Be Concerned?

The residual value when leasing a vehicle impacts your monthly payments. While on the outset, this doesn’t seem to make sense, it’s a fact. If the vehicle you drive has a higher residual value, you’re going to pay higher monthly payments compared to a vehicle with a lower number. This value is also recalculated every month and every year, which might mean the final cost of a vehicle is much higher at the end of the lease term than it is when you entered into the lease. Even if all you’re going to do is lease the vehicle and then enter another lease when you’re done, you should consider this value since it directly impacts your payments.

How is the Residual Value of a Vehicle Determined?

Major factors that lead to the value a vehicle has at the end of the lease term are past models and their value, consumer trends, and what the lending institution decides. You could visit different dealerships from the same brand in different locations and find the lease payments will be different for the same vehicle. While that doesn’t sound like a smart or fair way to handle the value of a vehicle, this is how the final value of your vehicle is determined.

You’ll Have a Good Idea of the Ending Price When You Sign

When you get ready to sign your lease, you’ll be provided with a residual percentage that helps you calculate the value of the car at the end of the lease term. This percentage is an estimate and can change by the time you’re ready to purchase your vehicle. If you plan to buy the car you’ve been driving, you’ll want to know the residual value of the vehicle you’re leasing to know what you’ll pay when the lease term is over.

Can You Negotiate the Residual Value?

Because most lease contracts have a buyout option, you’ll know the residual value of your vehicle when you sign the lease. Typically, this is one part of the contract that you cannot negotiate, but you can certainly try. If you have any inclinations to buying the vehicle outright at the end of the lease, you want a fair valuation of the vehicle to ensure you’re going to pay a fair price.

Some think you should want a higher value at the end of the lease, but that only leads to higher payments throughout your term and a higher price if you choose to buy the car.

Different Leases Can be Impacted by this Value

There are two types of lease contracts you can enter into. These are closed-end leases and open-end leases. Each one has its own benefits for you and is affected by the value of the vehicle at the end of the lease term. Pay attention to residual value and the leasing type you’ve chosen.

Looking at how this value impacts each type of lease, you’ll have:

Closed-End Leases

With this type of lease, if the vehicle you choose is worth less than the residual value when the lease has ended, you’re under no obligation to pay anything more than what you’ve agreed to in the contract. You can turn over the keys, settle up for any mileage overages, and walk away from the car.

Open-End Leases

Just the opposite is true for an open-end lease. If the car is worth less than the quoted residual value, you will be obligated to pay the difference between the current fair market value and the quoted residual value of the car. The leasing company is going to get their money for the vehicle one way or another.

Should You Buy a Car at the End of a Lease Term?

When the residual value of the car you’re leasing is less than the actual value, you might consider buying the car for the residual value and enjoying the drive of a car that’s worth more than you paid for it. Some drivers try to offer a buyout option to third-party entities when they know the car is worth more than the residual value. When they do this, they often pocket the difference in the price of the sale and the residual value of the vehicle.

Be Careful When Leasing a Vehicle

You might find a lease to be worth your time, energy, and money because you typically pay a lot less during the lease term than what you would if you buy the vehicle. Try to stick to closed-end leases and vehicles that have a history of offering good value at the end of the three or four-year term that you’ll be driving the car. If you do these things, you can enter a lease with an understanding of what the residual value is and how it can impact your payments during your lease term.