Residual Value
What is residual value on a lease?
Residual value is the leasing company's prediction, made at signing, of what a car will be worth at the end of the lease term. On a hypothetical $28,000 car leased at a 58% residual, that is $16,240. The leasing company sets it before you negotiate anything, and it drives your depreciation charge, the biggest piece of your monthly payment.
Key takeaways
- Residual value is the leasing company's forecast of a car's worth at lease end, fixed at signing and not something a dealer can change.
- Residual value is not the buyout price. The buyout price adds a purchase-option fee and sales tax on top of the residual value.
- On a hypothetical $28,000 car with a 58% residual, the residual value is $16,240, and it sets the depreciation charge, the largest piece of the monthly payment.
- A higher residual lowers the monthly payment because less predicted depreciation gets billed to you each month, but it also raises the buyout price at lease end.
- The residual value itself is not negotiable. What you can negotiate on a lease is the selling price and the money factor markup.
What is residual value on a lease?
Residual value is the leasing company's prediction, made at signing, of what the car will be worth at the end of the lease term. It comes from independent residual guidebooks and the leasing company's own experience with how that model holds value, not from anything the dealer decides.
That number does real work. It is one half of the depreciation charge, the formula that sets the biggest piece of your monthly payment: (adjusted cap cost minus residual value) divided by the term. On a hypothetical $28,000 car sold at $26,500 with a 58% residual and a 0.00250 money factor over 36 months, the residual value is $16,240 and the depreciation charge is $285.00 a month, computed with the site's lease calculator.
Can you negotiate the residual value?
No. The residual value is fixed by the leasing company before the lease program ever reaches a dealer's lot, so every dealer running the same offer on the same model, trim, term, and mileage quotes an identical number. There is nothing to counter, because the person across the desk did not set it.
That is a real protection, not just a fixed number working against you. In a closed-end lease you owe nothing if the car turns out to be worth less than the residual when you return it. For the full breakdown of why the residual is fixed, what that protects you from, and what you can negotiate instead, see can you negotiate the residual value on a lease.
Is residual value the same as the buyout price?
No, and mixing these up is one of the most common lease confusions. Residual value is the fixed forecast baked into your monthly payment. Buyout price is what you would actually pay to purchase the car at the scheduled end of the lease, and it is built from three pieces stacked on top of each other.
| Line | Amount | Where it comes from |
|---|---|---|
| Residual value | $16,240 | 58% of $28,000 MSRP, set by the leasing company at signing |
| Purchase-option fee | $350 | hypothetical example, set by contract |
| Subtotal | $16,590 | $16,240 + $350 |
| Sales tax, hypothetical 6% | $995.40 | 6% of $16,590, illustration only |
| Total buyout price | $17,585.40 | $16,590 + $995.40 |
The residual value never moves once it is set. The buyout price has two more line items stacked on it, and both the fee and the tax rate vary by contract and by state. For the full mechanics, including financing a buyout and when it beats returning the car, see how does a car lease buyout work.
Does a higher residual value always mean a better deal?
Not entirely. A higher residual lowers your monthly payment, because it assumes less depreciation for you to pay off, but it also raises the buyout price, since the buyout is built directly on top of the residual value. On this page's hypothetical $28,000 car, dropping the residual from 58% to 52% raises the depreciation charge from $285.00 to $331.67 a month, but it would also lower a later buyout: a 52% residual carries a $15,804.60 total buyout versus $17,585.40 at 58%, using the same $350 fee and 6% tax assumptions.
So a "good" residual depends on what you plan to do at lease end. If you plan to return the car, a higher residual paired with a lower payment is the better trade. If you plan to buy the car when the term ends, that same high residual means a bigger check at the finish line.
Common questions
What is residual value on a lease?
Residual value is the leasing company's prediction, set at signing, of what the car will be worth at the end of the lease term. It comes from independent guidebook data, not the dealer. On a hypothetical $28,000 car with a 58% residual, that value is $16,240, and it sets your monthly depreciation charge.
Is residual value the same as the buyout price?
No. Residual value is the fixed forecast baked into your payment. Buyout price is what you would actually pay to own the car: residual value plus a purchase-option fee plus sales tax. On a hypothetical $16,240 residual with a $350 fee and 6% tax, the buyout price comes to $17,585.40.
Can you negotiate the residual value?
No. The leasing company sets it before the offer reaches any dealer, so every dealer running the same program quotes an identical residual for that model, trim, term, and mileage. Negotiate the selling price and the money factor markup instead.
How does residual value affect the monthly payment?
A higher residual value lowers the payment, because less predicted depreciation gets billed to you each month. On a hypothetical $26,500 selling price, moving the residual from 52% to 58% of a $28,000 MSRP cuts the depreciation charge from $331.67 to $285.00 a month.
Who sets the residual value on a lease?
The leasing company, usually the manufacturer's captive finance arm, sets it using independent residual guidebooks and its own experience with how a model holds value. J.D. Power's ALG Residual Value Awards are one guidebook authority, published annually.
Sources
- Keys to Vehicle Leasing: More Information about Residual Value — Board of Governors of the Federal Reserve System