Determining the Meaning of Residual Value and Its Place in the Dealership
The term “Residual Value” occurs frequently in the world of lease dealers. The residual value affects more than just the monthly payments of the vehicle. It also affects the penalties the dealer gives you for early termination. You will encounter this term should they need to figure out your payment if you keep the vehicle at the end of the lease.
The meaning of the term “Residual Value” is the value of the item after it has been used for a length of time. In other terms it simply means the depreciation of the item or in this case the vehicle. Residual value affects your monthly payments because they figure the amount of value you will use of the retail or sticker price while you have it or for your length of lease.
If the car’s sticker price is $18,000 lease length is 24 months or 2 years: the dealer will estimate the value of that same car 2 years from now. This will help them determine the amount you will be using for the lease term.
Residual value = $13,000
Then 5,000 = the amount your payments will be calculated on over the two years
Payments will = $208.3 plus any added fees like interest, tax, etc…
If your vehicle will lose half over the same period then your payments will be figured like this:
Sample scenario: $9,000= Monthly payment of $375 Plus interest, tax, etc… a much higher payment for the same lease term. The residual factor is a big part of the monthly payments of the vehicle in a lease term.
They do this in reverse if you decide to keep the car. The residual value plays a big part in that figure as well. So if you are paying a lower monthly payment you could end up paying much more on the car when you decide to buy it. You attachment to your car could come at a much bigger cost then you expected.
The residual value is important in a lot of scenarios when it comes to leasing your vehicle. How do you determine the one that is best for you? That definitely depends on if you are planning to purchase the car at the end of your lease or simply lease the car. If the payment is lower during leasing and you only plan to lease then it would be right for you. But if you think you might purchase a slightly higher monthly payment might help you at the end of the lease term.
Determining what works is really a matter for you to decide. Paying the higher monthly payments sure can help you in the long run if you are thinking of purchase but you must also make sure you can afford to pay a higher monthly payment for 24-36 months or whatever you lease term is. On the other hand if you are looking for a vehicle to keep you in the current trend and want to exchange it after the lease term is over the lower monthly payments should be considered it will pay off better in the end.
Guy Starbuck is a tennis and golf playing, health oriented, coffee drinking writer and financial guru who writes for MotorMaven.com, and Cargoyle.com.
