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The "Residual Value" of Leasing

Edmunds.comEdmunds.com Posts: 10,059
edited June 2017 in Editorial
imageThe "Residual Value" of Leasing

When you lease a vehicle, you might hear the term residual value mentioned by the salesperson. What is residual value? And what effect does it have on your lease payment?

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Comments

  • Lease Calculator


    Equipment Cost:$52000

    No. Of Advance Payments:1

    Payment Frequency:Annual

    Term:60

    Rate (Desired APR):6.25%

    Residual Amount:$36710




    Payment Amount:$5598.95
    Is this filled out correctly?
  • When filling out a lease is your Residual Amount less then the original cost or would it be the same?! Like if you had a term of 5 years and it cost $52,000 to purchase the item and by the end of the fives years you would be able to buy it for $36,710?!

    Lease Calculator: Cost:$52000 No. Of Advance Payments:1 Payment Frequency:Annual Term:60 Rate (Desired APR):6.25% Residual Amount:$36710 Payment Amount yearly:$5598.95: Is this filled out correctly?
  • The link to https://www.alg.com/products/residual-values/ costs $450 bucks... did the OP realize this when linking?
  • If I'm reading this correctly, it seems the original poster thought that $5598.95 was too high of a payment to be correct. However, the payment frequency is listed as annually, rather than monthly, so the $5598.95 needs to be divided by 12 to get to the monthly payment.
  • bmwpcbmwpc Posts: 22
    Would the residual value be different for a car that is leased the first day a new year model comes out or 9 months later. They would both be current model year cars but one has been in service almost 9 months before the other enters service.
  • kyfdxkyfdx Posts: 133,854
    bmwpc said:

    Would the residual value be different for a car that is leased the first day a new year model comes out or 9 months later. They would both be current model year cars but one has been in service almost 9 months before the other enters service.

    The residual values on lease programs tend to drop over the model year, but they don't have to. Manufacturer's captive finance arms can use artificially high residuals as an alternative to other incentives.

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  • bmwpcbmwpc Posts: 22
    I realize that incentives can affect the final lease cost but I am talking about the pure residual value. Also, who sets it and what do they use to set it? Also, as it is posted quarterly, when is it posted. My 2018 MB is in port now but can't be delivered for a few days because its a 2018. When will it's residual be set for my lease? In other words is it truly subjective or set to some industry standard.
  • MichaellMichaell ColoradoPosts: 127,545
    bmwpc said:

    I realize that incentives can affect the final lease cost but I am talking about the pure residual value. Also, who sets it and what do they use to set it? Also, as it is posted quarterly, when is it posted. My 2018 MB is in port now but can't be delivered for a few days because its a 2018. When will it's residual be set for my lease? In other words is it truly subjective or set to some industry standard.

    The bean counters and the marketing folks of the leasing company (in your case, MBFS) arm-wrestle to determine the residual value.

    MB tends to update the residual value monthly.

    If the 2018's are about ready to show up at the dealers, it's likely the lease numbers will be available in May.

    Bottom line - it's subjective.

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    2015 Subaru Outback 3.6R / 2014 MINI Countryman S ALL4

  • For a leasing agreement, do I record the auto-asset at the fair market value and then add extra book depreciation to factor in the "Depreciation and any amortized amounts ("DAA")?" I am looking at a lease agreement with 48 monthly payments of P, an "Adjusted Capitalized Cost ("ACC") a Residual Value ("RV"), and the DAA = ACC minus RV. Let's say I would normally depreciate an auto for 5 years. Am I stating enough hypotheticals? Is there a place I look to plug in numbers from a "California Motor Vehicle Agreement?"
  • kyfdxkyfdx Posts: 133,854

    For a leasing agreement, do I record the auto-asset at the fair market value and then add extra book depreciation to factor in the "Depreciation and any amortized amounts ("DAA")?" I am looking at a lease agreement with 48 monthly payments of P, an "Adjusted Capitalized Cost ("ACC") a Residual Value ("RV"), and the DAA = ACC minus RV. Let's say I would normally depreciate an auto for 5 years. Am I stating enough hypotheticals? Is there a place I look to plug in numbers from a "California Motor Vehicle Agreement?"

    Fair market has nothing to do with a lease agreement.
    DAA = ACC minus RV is it. Divide that amount by the lease term for monthly depreciation. It's just a way to calculate a monthly rental fee. The bank provides the variables, and Fair Value or actual depreciation don't matter.

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  • theitpetetheitpete Posts: 2
    What happens at the end of the lease if you want to buy the car? How is the purchase price figured at that point? Is it the residual value?

    Say I lease a $50,000 car. The lease agreement has figured that after 3 years, the residual will be $35,000 and so my lease payments have paid that $15,000 off the car. So at lease end, I can buy the car for $35,000?
    Now say market factors have really changed. The car actually isn't worth $35,000 in the market, but is only worth $25,000. Would I have the option to buy the car at $25,000 at the end of the lease, or would the price still be $35,000.
    Or say the opposite, the car has become valuable in the market after 3 years and it is valued at $45,000. Could I still buy the car at the end of the lease for the $35,000, or would my lease end and the dealership would try to sell it to me for $45,000 now?
  • kyfdxkyfdx Posts: 133,854
    theitpete said:

    What happens at the end of the lease if you want to buy the car? How is the purchase price figured at that point? Is it the residual value?

    Say I lease a $50,000 car. The lease agreement has figured that after 3 years, the residual will be $35,000 and so my lease payments have paid that $15,000 off the car. So at lease end, I can buy the car for $35,000?
    Now say market factors have really changed. The car actually isn't worth $35,000 in the market, but is only worth $25,000. Would I have the option to buy the car at $25,000 at the end of the lease, or would the price still be $35,000.
    Or say the opposite, the car has become valuable in the market after 3 years and it is valued at $45,000. Could I still buy the car at the end of the lease for the $35,000, or would my lease end and the dealership would try to sell it to me for $45,000 now?

    You have the option to buy the car at the residual amount, per the lease contract. Actual value doesn't matter. The dealership has nothing to do with it, as the car is owned by the leasing bank.

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    Edmunds Moderator

  • theitpetetheitpete Posts: 2
    kyfdx said:



    You have the option to buy the car at the residual amount, per the lease contract. Actual value doesn't matter. The dealership has nothing to do with it, as the car is owned by the leasing bank.

    Okay, so I decline to buy the car and turn it back in. What happens to the car next? Does the leasing bank then sell it to put it "back into the market"? At that point the market fluctuations would then impact what the leasing bank could get for it.

    What I am basically trying to figure out is if leasing a car you know you will want, and gambling on the fact it may not hold the value the leasing bank expected at the start of the lease, would enable you to "buy" a car for a lower value overall than had you just bought it from the start.

    For example, say you are looking at a Dodge Charger Hellcat. Right now, gas prices are good and having a 707HP V8 isn't a big deal on the gas fund. 3 years from now, gas prices have doubled or tripled and nobody wants Hellcats because of the cost of gas. This would have an impact on market value and a leasing bank or dealership would have a hard time reselling the turned in lease for the residual in order to get their full value out of the car. So now instead of selling the car for the residual value, they have to knock the price down $10,000 in order to sell it off their books. It is a gamble, but could it turn into a profitable way to "buy a car for less than the sticker/haggled price"? If the market doesn't play the way you thought it would, you still just turn it in after the lease and move to the next car.
  • kyfdxkyfdx Posts: 133,854
    theitpete said:

    kyfdx said:



    You have the option to buy the car at the residual amount, per the lease contract. Actual value doesn't matter. The dealership has nothing to do with it, as the car is owned by the leasing bank.

    Okay, so I decline to buy the car and turn it back in. What happens to the car next? Does the leasing bank then sell it to put it "back into the market"? At that point the market fluctuations would then impact what the leasing bank could get for it.

    What I am basically trying to figure out is if leasing a car you know you will want, and gambling on the fact it may not hold the value the leasing bank expected at the start of the lease, would enable you to "buy" a car for a lower value overall than had you just bought it from the start.

    For example, say you are looking at a Dodge Charger Hellcat. Right now, gas prices are good and having a 707HP V8 isn't a big deal on the gas fund. 3 years from now, gas prices have doubled or tripled and nobody wants Hellcats because of the cost of gas. This would have an impact on market value and a leasing bank or dealership would have a hard time reselling the turned in lease for the residual in order to get their full value out of the car. So now instead of selling the car for the residual value, they have to knock the price down $10,000 in order to sell it off their books. It is a gamble, but could it turn into a profitable way to "buy a car for less than the sticker/haggled price"? If the market doesn't play the way you thought it would, you still just turn it in after the lease and move to the next car.
    Assume it's Chrysler Capital. Are they going to sell the car cheap to you? No, if it's worth less than the residual, they will offer it to their dealer. Directly, if that dealer took the lease return, or through a Chrysler-only dealer auction. They are only required to offer it to you at the residual value, as the contract states. Most banks will not negotiate the buyout price.

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    Edmunds Moderator

  • LiohioLiohio Posts: 1
    I have a dealership asking for my car back when I still have a year on the lease. What is my advantage to do this
  • MichaellMichaell ColoradoPosts: 127,545
    Liohio said:

    I have a dealership asking for my car back when I still have a year on the lease. What is my advantage to do this

    None, to you. Dealer gets to lease you another car.

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    MODERATOR

    2015 Subaru Outback 3.6R / 2014 MINI Countryman S ALL4

  • jayblom8jayblom8 Posts: 3
    Can someone tell me the current residual, money factor and lease credits on a 2020 Chrysler Pacifica S? I'm looking at leasing one for my wife and the dealer gave us a rather large monthly payment, so I'm doing some research on my own end to see where the payments really should be.
  • kyfdxkyfdx Posts: 133,854
    jayblom8 said:

    Can someone tell me the current residual, money factor and lease credits on a 2020 Chrysler Pacifica S? I'm looking at leasing one for my wife and the dealer gave us a rather large monthly payment, so I'm doing some research on my own end to see where the payments really should be.

    We have a dedicated discussion for the 2020 Pacifica lease program.
    Please post here:
    https://forums.edmunds.com/discussion/57941/chrysler/pacifica/2020-chrysler-pacifica-lease-deals-and-prices#latest

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    Edmunds Moderator

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