The term, residual value, in car leasing, refers to the predicted lease-end value of a vehicle. This value is very important in the calculation of monthly lease payments since leases are based on the difference between negotiated selling price and residual value .
For a given selling price, a higher residual value will produce a lower lease payment.
Residual value is a predetermined estimate by a lease company (not by a dealer) as to how much of a vehicle’s original value (sticker price, not selling price) will remain after the vehicle has aged and been driven for a specified period of time and a specified number of miles.
In effect, it attempts to predict lease-end wholesale resale value. The older a vehicle becomes and the more miles it is driven, the lower the residual value. Residual values are different for leases with different mileage allowances. A 15,000 mile-per year lease residual will be lower than a 10,000 mile-per-year residual for the same vehicle.
Car lease residual values are educated guesses by leasing companies or by companies who specialize in estimating residuals, and based on historical information and other factors. Values can vary from company to company. Some lease companies, finance companies, and banks use a service that estimate residuals for them. Car manufacturers typically set their own residuals using their own data.
Finance companies owned by car manufacturers, such as Honda Financial Services and Ford Credit, often use temporary artificially inflated residuals to create low promotional lease payments. The company then takes a loss at lease-end when customers return their vehicles. They can often justify this strategy if it improves the number of vehicle sales.
Leasing consumers are often frustrated that lease residual values are not standardized and not readily available. Residuals change often, especially for short-term promotions, and vary by lease company, even for the same vehicle.
Here’s a video that explains car lease residual value: