Understand Car Lease Residual Value
What are lease residuals and how to find them?
Residual value (“residuals”), in car leasing, refers to the estimated — repeat, estimated — wholesale value of a leased vehicle at the end of the scheduled lease term. 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 smaller the difference, the lower the lease cost and payments for a given selling price.
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 assumed 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 — by experienced “experts” in the business.
Who sets car lease residual values?
Residual value estimates can vary, 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 fixed for a particular vehicle make and model — that everyone has the same residual.
There are industry sources (ALG, Blackbook, and others) for automobile residual values that many lease finance 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.
“Captive” finance companies owned by leading car manufacturers, such as Ford Credit and Honda Financial Services, 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-average values because they can afford to lose money on the back end of the lease to get the business on the front end.
Note: The Cars.com web site has residual percentages (cars.com/go/alg) that come from the industry source ALG, but these numbers are always out of date. Again, lease finance companies associated with car manufacturers may consult such numbers as input but rarely ever use them directly in setting their own residuals.
How are car lease 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 amounts of money due to over-inflated lease residual values. Of course, leasing consumers were the happy beneficiaries.
Although residuals have become somewhat more moderate in the current economy, 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 we might get on a particular day, from 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 from which you will lease. Unless you have inside knowledge of the residual values from the finance companies used by your dealer, the dealer is the only other source.
Even though you might know the residual percentage for a particular car, different equipment and option packages for that car can be “residualized” differently. For example, even though upgraded floor mats, paint protectant, and rust proofing are part of a car’s MSRP, they are not usually residualized, meaning that residual value is calculated on a value less than full MSRP.
Car manufacturers often advertise promotional lease deals on TV or in newspapers, in which they disclose the residual value (stated as “purchase option” price) for those deals. These residuals are usually “subvented” or boosted above the company’s normal residuals for those vehicles.
Finding car lease 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 makes and models, such as the Ford Flex, 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, which makes them better lease vehicles.
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 (unless it’s an advertised deal with the residual specified), average values provided in the Lease Kit will allow you to simply compare your residual with the average to understand if you are getting a good deal or not — much like you would compare your interest rate with the national average rate from Bankrate.com.
As an example, a 50% 3-year 12K miles residual percentage on a vehicle, such as Ford Flex, that has low average residuals might be a good deal, where 50% residual on a vehicle, such as Honda Accord, that has much higher average residuals would not be a good deal.
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 12,000 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.
If I get two different residuals from two different dealers, same car, which should I take?
If you want the lowest monthly payments and don’t expect to buy your vehicle at lease-end, go with the highest residual.
If you expect to buy your vehicle at lease-end and don’t mind higher payments, go with the lowest residual.
However, residual value isn’t the only component of a lease deal. There’s also price and money factor. It’s the combination of all these components that makes or breaks a deal. Use our Lease Deal Calculator, which takes into account all the factors of a lease and tells you whether it’s a good deal or bad deal.
Watch this video for more about car lease residual values: