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Why Lease-End Residual Values Are Important in Car Leasing |
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End of lease residual value is one of the four primary factors that determine car leasing payments, and determines if the lease deal is good or not-so-good. The other factors are price, money factor, and term. Although all the factors are important, residual value can have one of the greatest effects and is well worth the automotive consumer's consideration. Residual value is sometimes called "resale value" since it is a statement of a vehicle's market value at the end of a lease. Residuals are always stated as a percentage of MSRP. Some vehicle makes and models have higher lease-end percentages than others. The Lease Kit contains a Residual Calculator for all vehicle makes and models. Since car lease payments are calculated using the difference between lease price (cap cost) and residual value, a higher residual will result in a lower payment, for the same lease price. A comparison of two vehicles of the same price, one with a high residual value and the other with a low residual value, the one with the high residual will be significantly cheaper to lease than the other. Let's look at a specific example of how residual value affects a car lease deal. Let's say we have a Honda Accord which has a MSRP of $22,000, negotiated price of $20,000, 36 month term, money factor of .00220 (5.28% APR), and a 54% residual percentage ($11,880). The monthly lease payment for this vehicle would be $295.69 (without tax). Now let's assume we have a Kia Amanti, a vehicle very similar to the Honda Accord, with the same MSRP as the Honda, same negotiated price, same money factor, and term. In this case, however, the 36-month residual percentage is only 34% (from the Lease Kit). This makes the lease-end residual value only $7,480 for the Kia, compared to $11,880 for the Honda. — a significant difference. The monthly lease payment for the Kia calculates to be $408.23. This is a whopping $112.54 lease payment difference for two cars that are very much alike and priced the same. Actually, the Honda is considered to be generally superior to the Kia in quality and reliability (which is part of the reason for it's high residual value) — for less money. Since residual values are not negotiable when leasing, the only control you have is to simply shop for dealers and lease companies who have the highest residual values. For dealers who use their manufacturer's finance company, such as Ford Motor Credit or Amercian Honda Finance, residual values will be the same across dealers. However, some dealers use banks and credit unions for customer lease financing and residual values can vary widely. Contrary to some thought, there are no "standard" residuals as such. There are widely accepted industry guidelines and "books" of residuals, but individual finance companies, banks, and credit unions can modify "book" values any way they choose. If they want to make their leases more attractive with lower payments, they might opt for higher-than-book residuals. If they want to be more cautious and reduce risk of lease-end loss, they might opt for lower residual values. In summary, since residual value is so important in car leasing, it is just as important, if not more so, to consider this factor along with price and finance rates. See the article, Car Lease Residuals, for more details.
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