What is Residual Value and How is it Calculated in a Lease?

July 15th, 2019 by

Signing a lease can be an intimidating ordeal, especially if you aren’t familiar with all the lingo.

You don’t want to get bogged down by the terminology and calculations, and possibly end up unhappy with your lease negotiation.

At Boch Nissan South, we know how important it is to feel confident about the financial agreement of your leased vehicle, so let’s start with one of the most basic factors that go into calculating a lease: residual value.

What is it?

Residual value is the vehicle’s expected value at the end of your lease period. It’s important because its used to calculate the total cost and monthly payments of your lease. See below.

(Capitalized Cost – Residual Value) + Fees + Interest = Lease Cost

Capitalized cost is the value of the vehicle at the start of your lease. This formula shows that you, the lessee, will only pay for the depreciation of the vehicle during your lease period rather than the entire vehicle’s value, plus fees and interest.

The residual value is also important because its the price at which you can buy the car from the leasing company at the end of your contract, if you choose.

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Man writing on paper with an old alarm clock and a small piggy bank with coins piled in front of him

How is it calculated?

The lessors, or the bank that issues the lease contract, is who decides on the residual value. The residual cost is always stated in the lease.

As for accuracy, it’s pretty much their best guess as to what it will be worth at the end.

This is important because if your vehicle’s value ends up being lower than the expected residual value, then you could end up paying more when you return it to the dealership. However, if it has a higher value than what was expected, then you could potentially receive lease equity to use towards your next vehicle purchase or lease.

The residual value is usually calculated based on past models and future predictions. You can check current model’s residual rates in the Black Book, which may be available at your local bank in the auto loan department.

A useful online tool is the Automotive Leasing Guide, which is used as a starting point by many leasing companies. There are a few other resources out there, and it wouldn’t hurt to get a few different numbers so that you can get an idea of what to expect.

You typically can’t negotiate the residual value, so make sure to browse your options so you can find an affordable monthly payment.

Also, considering which models hold their value well would be smart because the faster they depreciate, the more you’ll be paying.

Want to know more about leasing a Nissan? Ready to schedule a test drive? Contact one of our sales and leasing staff at Boch Nissan South for more information or come into our dealership at 685 S. Washington St., North Attleboro, MA 02760.

We hope this article was helpful!

 

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