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Residual
Value, Understand Car Lease Residual Values
Residual value ("residuals"),
in car leasing, refers to the estimated — repeat, estimated
— value of a leased vehicle at the end of the scheduled lease period.
The longer the lease, the lower the residual value, as compared to the
original MSRP sticker price.
Residual values play
a key part in the calculation of lease monthly payments since leases are
based on the difference between residual value and negotiated selling
price. The higher the residual, the lower the lease cost for a given selling
price. See Why Lease-End Residual
Values are Important.
What are residuals?
Car lease residuals are a statement of the expected depreciation
of a vehicle's value over the life of a lease. The value can be affected
by a number of factors, including expected average annual mileage, number
of months in the lease, make/model vehicle, resale history, predicted
future supply and demand, rise/fall in gas prices, and anticipated future
economic conditions. In short, lease residuals amount to nothing more
than an educated guess.
Who sets residual
values?
Residual value estimates can be different, depending on who is doing the
estimating. One dealer who uses a particular lease company may offer a
significantly different residual value than another dealer who uses a
different company, for exactly the same vehicle and same lease. It is
often misunderstood by consumers that residuals are constant for a particular
vehicle make and model.
There are industry
sources (ALG, Blackbook, and others) for automobile residual values that
many lease companies use as a basis for setting their own values. A lease
company may adjust those values up or down, depending on how competitive
they want to be, and how much risk (of estimating too high) they want
to take.
Finance companies
owned by leading car manufacturers, such as Ford Motor Credit and GMAC,
are the most aggressive in setting residuals. Manufacturers usually set
their own residuals and frequently promote limited-time lease deals that
offer higher-than-normal residuals — and lower-than-normal monthly
payments.
Manufacturers'
residual values are nearly always higher than industry residuals because
they can afford to lose money on the back end of the lease to get the
business on the front end.
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How are residuals
set?
Auto lease residuals are always — always — set as a percentage
of MSRP — never on negotiated price. This is a point that
is frequently misunderstood by leasing consumers. For example, a vehicle
with a MSRP sticker price of $30,000 and a 50% residual percentage would
have an estimated $15,000 residual value at lease-end — regardless
of negotiated lease price.
Over the last few
years, many car manufacturers and banks have lost substantial money due
to over-inflated lease residual values. Of course, leasing consumers were
the happy beneficiaries.
Although residuals
have become somewhat more moderate, values are still high due to the competitive
nature of the automobile sales industry. It is in the best interest of
car manufacturers to keep residual values artificially high to keep payments
attractively low.
How do you
know your residual value?
Many car lease consumers are often frustrated in their pre-lease planning
by not being able to predict exactly what residual value they might be
offered by a dealer. In this sense, lease residuals are much like interest
rates on car loans. Although we can determine what the national or regional
average interest rate might be (Bankrate.com),
we can't predict exactly what interest rate a particular consumer will
be offered on a particular day, by a particular dealer, who uses a particular
finance company. Same for car residual values.
The only way to know
exactly what your residual value will be for a specific
car lease — is to ask the dealer. Unless you have knowledge of the
values from the bank or finance companies used by your dealer, the dealer
is the only other source. Sometimes car manufacturers advertise promotional
lease deals on TV or in newspapers, in which they disclose the residual
value for those deals. These residuals are usually "subvented"
or boosted above the company's normal residuals for those vehicles.
Finding residual
values
The LeaseGuide.com Lease Kit
provides average estimated residual values and
percentages in its Residual Value Calculator
for all vehicle makes and models, based on three major vehicle classifications,
and for all common lease terms. Certain classes of vehicle, such as Ford
Focus, have characteristically low future resale values and, therefore,
low average residuals — and are not the best lease vehicles. In
the highest class, vehicles such as Honda Accord and most Lexus models
have consistently high future resale values and high residuals.
Is your residual
a good deal?
Although no one can predict the residual value you'll get from a particular
dealer on a particular day, the Lease
Kit average values will allow you to do your lease planning
and lease deal evaluation with a good degree of accuracy. You simply compare
your residual with the average value, much as you would compare your interest
rate with an average rate.
Even when you get
a residual value quote from a dealer or newspaper ad, it's difficult to
know if it's fair unless you have an average value to compare with. If
your dealer gives you a 49% residual on a new Ford Focus 36-month lease
with 15,000 miles per year limit, is this a good deal or not? Is it average?
Is it high? Is it low? This is where the Lease
Kit can help.
Footnote
For a very detailed academic understanding of Residual Values,
see the article, "Manufacturer
Advantages in Residual Value Estimation." This is not light
reading, but is very enlightening if you can stick with it. It certainly
ilustrates the complexity and uncertainty of predicting car lease residual
values.
 For
more, see LeaseGuide.com
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