How Residual Values are Calculated
The residual value is simply the estimated value of the car at the end of the lease.
It's the price at which you can buy the car from the leasing company if you decide to keep it when your lease is up - and this figure is always stated in the Lease Contract.
The residual value is shown as a dollar figure, but it's actually calculated as a percentage of MSRP (Manufacturer's Suggested Retail Price).
For example, let's say the car you're leasing has a sticker price (MSRP) of $25,000 and its residual value is 50% after a 36 month lease. The car will have a residual value of $12,500 at the end the lease - pretty simple.
So how do leasing companies determine the residual values? Most use the Automotive Lease Guide (ALG) as a starting point. ALG publishes a Residual Percentage Guide that lists each vehicle's predicted wholesale value after 2, 3, 4, and 5 years.
The wholesale value is the price the car will typically sell at auction, which is how some leasing companies dispose of their vehicles after the lease ends.
The wholesale value is lower than what the car would fetch at retail price - so it's good to keep that in mind.
In order to view the latest ALG residual values, you need to purchase a one-year subscription through their web site at ALG.com. The subscription costs about $100.
Alternatively, some leasing software programs such as Expert Lease Pro include the ALG values as part of their licence.
Cars.com also lists the ALG residual values, however, the information is not completely up-to-date.
Although most leasing companies use ALG as their main guide, the residual values you'll get quoted tend to be a few percentage points higher than what ALG quotes. This is because many leases are subsidized by the manufacturer and they artificially raise the values in order to lower the lease payments.
Different leasing sources will often quote different residual values for the same vehicle. These are not negotiable, so that's why it really pays to get lease terms from multiple sources including banks, car dealers, credit unions and independent leasing companies.
One easy way to see what the going rates are: call up the finance department of a local car dealer and ask them what the best current residual values and money factors are for a 36 month, 15,000 miles per year lease (or whatever your preference is) for the car of your choice.
You should have no problem getting this information.
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Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid