Residual Value

Residual Value is a term used in a car lease that refers to the residual, or remaining, value of the car at the end of a lease term. In a closed end lease or open end lease, the estimated residual value is used to calculate the monthly lease payment.

For example, if a car is worth $25,000 when new, and at the end of a 3 year lease is expected to have a residual value of $15,000, then the car lost $10,000 in value over the term of the lease.  The lease payments need to include the lost value plus interest and fees.  This is sometimes referred to as the net capitalized cost.  The residual value is calculated using an assumption for the number of miles driven.  If the car has higher mileage than allowed, a mileage charge may apply.

This example demonstrates the importance of the residual value and its relationship to how well a car holds its value.  Some luxury cars are very popular as used cars; therefore, market demand keeps their price relatively high.  This results in a high residual value and lower lease costs.

Since the lease payments were based on an estimated residual value, it is also the price at which the leaseholder can purchase the car at the end of a lease.