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What is Residual Value When Buying a Car?

Residual values apply solely to leasing a car.  At its most basic, the residual value is what the car will be worth at the end of the lease.  More specifically, it’s how much you can buy the car for at that time.  Different companies calculate this in different, attempting to determine how much the vehicle will depreciate over the course of the lease (often 3 years or 36 months).  So what’s better:  a high or low residual value?  Well, that depends on your priorities, as each has its own advantages and disadvantages.

High Residual Value:  Good or Bad?

  • High Residual Value:  Typically, this is preferred by most lessees, because higher residual values translate into lower monthly payments.  That’s because, in a lease, you are paying for the value of a car during the time you drive it.  If it retains its value well, then you will owe less.  This is best illustrated through an example.  Say you buy a $20,000 car, and it has a residual value of $12,000.  That means you’ll owe $8000 over the term of the lease.  If another $20,000 car has a residual value of only $10,000, then you’ll owe $10,000 over the term of the lease.  Obviously, your monthly payments will be higher in this case.
  • Low Residual Value:  Now, as discussed, a lower residual value will result in higher monthly payments.  If you are leasing a car, there’s a good chance that monthly payment is your number one priority.  However, all leases give you the option of doing a “lease buyout” – buying the vehicle once the lease is up.  Over the course of the lease, you may have developed an attachment to the vehicle, and you may want to keep it.  Well, if your vehicle has a lower residual value, then it will be more affordable at this point.  After all, it will have depreciated more.  In general, though, this is a difficult to plan for.  If you really wanted to own the car, you probably would have financed it, not leased it.

So, in general, you are better off with a high residual value.  Not only will your monthly payments be lower, but a high residual value is often the mark of a higher-quality vehicle.

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