Should you be in the market to lease a Used Car, it doesn’t matter what model or brand and can be a Toyota Used Car for instance, you’ll hear the term “residual value” bandied around often.
Any residual value will not only affect your monthly obligations, but is equally used by leasing companies to determine any penalties should you break your lease early and how much to pay should you chose to buy the Second Hand Car at the conclusion of your lease.
Why don’t we begin by exploring the significance of residual value. The term “residual value”, applies to the value of the Used Car as soon as it has been used for some time. In leasing lingo, it pinpoints the depreciation of the Second Hand Car value in the duration of the lease.
How will it specifically affect your monthly bills?
Once you lease a Used Car, you have to pay for the used car’s value that you ‘consume’ over the lease length.
Assume you actually leased a $18,000 used car for 2 years: the leasing organization needs to estimate the value with this used car in two years time so as to understand what amount of the used car you will be consuming’ throughout your lease term.
This is where the “residual value” will come into the equation.
If the residual value is actually estimated to be $13,000 at the conclusion of your lease, in that case your monthly payments will be calculated on the $5,000 you will ‘consume’ over two years, giving an average payment per month of $208.3 (plus interest, tax and fees).
How about if the used car is anticipated to drop half its value over the similar period?
In this scenario, you will end up ‘consuming’ $9,000 over the same period, leaving you with a higher monthly payment of $375 (plus interest, tax and fees).
As you can see, residual values really are a key factor in determining what amount of cash to spend on your lease and the higher the residual value, the lower your monthly fees.
This works in reverse if you develop an emotional connection with your used car and choose to buy it at the conclusion of your lease. In the event that we stick with a similar example above, the lower monthly payments in the second scenario arrive at the cost of paying substantially more to purchase your used car at the end of the lease.
Therefore, since the residual value is so impotatant, how do you know which is the most suitable for me?
Clearly, it all depends whether you want to purchase the used car at the conclusion of your lease. In the event that you don’t want to make a significant deposit and you would like low monthly payments, a used car that holds with a higher residual value is an excellent deal. In case you are thinking of purchasing the used car at lease conclusion, you’ll need to balance low month-to-month payments with a moderate residual value.
