Residual value: what it is and why it sets your lease payment
Residual value is what the leasing company expects your car to be worth at the end of the lease, fixed in the contract on the day you sign. Your payment covers the drop from the capitalized cost to the residual, so a higher residual means a lower payment.
The residual in one picture
The residual is what the car should be worth at the end.
What the car loses over the lease. Your payments cover this part.
The 60% residual: what the lender expects the car to be worth at the end. It sets your buyout price.
Made-up round numbers: a $50,000 MSRP and a $50,000 capitalized cost. The residual is fixed in the contract on the day you sign. Not an offer.
Key takeaways
The lender sets it for each model, term and mileage, so you generally can't negotiate it. It also sets the price if you decide to buy the car when the lease ends.
How residual value is set
The leasing company decides the residual. It's usually expressed as a percentage of the car's MSRP for a given term and yearly mileage, and it appears in your contract as a dollar amount. Three things move it:
Term. A longer lease means an older car at the end, so a lower residual percentage.
Mileage allowance. More miles a year means a more worn car at the end, so a lower residual. See choosing your lease mileage.
The car. Models the lender expects to hold their value get higher residuals.
Why residual value drives your lease payment
The depreciation charge, usually the largest part of a lease payment, is the capitalized cost minus the residual, spread over the term. Change the residual and the payment moves a lot.
Example (made-up round numbers): a car with a $50,000 MSRP and a $50,000 capitalized cost, 36 months, money factor 0.00200.
60% residual ($30,000): depreciation of $555.56 plus a rent charge of $160.00 is $715.56 a month before tax.
55% residual ($27,500): depreciation of $625.00 plus a rent charge of $155.00 is $780.00 a month before tax.
In the example, five points of residual moved the payment by about $64 a month, or about $2,320 over the lease. The rent charge actually fell a little with the lower residual, but the bigger depreciation charge outweighed it. That's why two cars with the same price can have very different lease payments, and why a car with a strong residual is often the better lease even when it costs more.
Why it drives the payment
Higher residual, lower payment.
Depreciation of $555.56 plus a rent charge of $160.00, a month before tax.
Depreciation of $625.00 plus a rent charge of $155.00, a month before tax.
Same car, 36 months, money factor 0.00200. Five points of residual moved the payment by about $64 a month, or about $2,320 over the lease.
Can you negotiate the residual value?
Not in the usual sense. The CFPB notes that the leasing company determines the residual value, and a dealer can't change the lender's figure for your term and mileage. You still have three levers:
Term and mileage. Each combination has its own residual, so compare quotes on the same term and miles.
The lender. If more than one lender leases the car, another lender may set a different residual.
The price. Lowering the capitalized cost cuts the depreciation you pay without touching the residual. See capitalized cost.
If two dealers quote the same car, term and mileage with different residuals, ask each one which lender and program the number comes from.
Where to find the residual value on your contract
Federal Regulation M requires the lease to show the residual value in dollars in the section that explains how your payment was calculated, alongside the adjusted capitalized cost, the depreciation and the rent charge. Quotes often give it as a percentage instead. To turn a percentage into dollars, multiply it by the MSRP it's based on; to go the other way, divide the dollar figure by that MSRP. The purchase option price appears separately in the contract, so compare the two to see whether a purchase option fee has been added.
Residual value at the end of the lease
It sets your buyout price. The purchase option price in your contract is based on the residual, sometimes plus a purchase option fee. See buying out your lease.
If the car is worth more than the buyout price, the difference is equity you can use by buying, selling or trading the car. See lease equity.
If it's worth less, a closed-end lease lets you return it and walk away, paying only charges the contract sets, such as excess wear, excess mileage and a disposition fee. An open-end lease leaves you responsible for some of the shortfall, so check which kind you're signing.
What is a good residual value?
For the payment, higher is better. But a high residual isn't automatically a good deal: it also means a higher buyout price, so less chance of equity at the end. A strong lease combines a low capitalized cost, a high residual and a low money factor, so judge the whole quote rather than one number.
Residual value in California
The residual isn't taxed during the lease. California taxes your payments, which cover the value you use, not the value you hand back. If you buy the car, the buyout price is taxed as a sale. See California sales tax on a car lease.
You're entitled to buyout information. Vehicle Code section 4453.5 requires the lessor, on your written request, to disclose the payment amount and the documents needed to exercise a purchase option.
What to ask
What's the residual as a percentage and in dollars, and which lender set it?
Which MSRP is it based on? It should match the window sticker.
What would the residual be with a different mileage allowance or term?
What's the purchase option price at the end, and is there a purchase option fee?
Is this a closed-end lease?
Run any dealer quote through Check my quote.
How 021 helps
021 gets several dealers to quote the same car, and you get one written quote with the payment, drive-off, term, miles, taxes, fees and our fee before you agree to anything. If you already have a quote, send it through Beat my deal and we'll beat it or tell you it's already a good deal.
Can you negotiate it?
The lender sets the residual. You still have three levers.
Term and mileage
Each combination has its own residual. A longer term or more miles a year means a lower one.
Do thisCompare quotes on the same term and miles
The lender
If more than one lender leases the car, another lender may set a different residual.
AskWhich lender and program the number comes from
The price
Lowering the capitalized cost cuts the depreciation you pay without touching the residual.
Do thisNegotiate the price of the car
A high residual also means a higher buyout price, so less chance of equity at the end. Judge the whole quote rather than one number.
Common questions
Can a dealer change the residual value?
What is a good residual value on a car lease?
Is the residual value the same as the buyout price?
Can you negotiate the residual value at the end of the lease?
Why is my residual value lower than I expected?
How is residual value calculated?
021 Auto Leasing is a licensed California autobroker (license #82402). All new cars arranged for sale are subject to price and availability from the selling franchised new car dealer.