There are many benefits to leasing vs. financing when paying for your next vehicle. For example, you're not tied to a long-term commitment, can enjoy the latest features and tech more often, and will generally pay less over the same time period. However, there are a few aspects to look for when considering a lease, one of them being the vehicle's residual value. Since you're paying to use the car for a predetermined term, and the dealer will look to sell the vehicle as used after you return it, the lease payments cover the vehicle's depreciation. And residual value is the vehicle's remaining value at the end of the lease term.

How is residual value calculated?

Companies determine residual value by considering a variety of factors, including perceived reliability, safety, resale value, and projected market conditions. Other aspects like gas prices, economic conditions, and the introduction of new technologies can also have an effect on residual value.

So, for example, if a vehicle has an MSRP of $40,000 and its projected residual value after a three-year lease is 50%, then the car is expected to be worth $20,000 when it's returned to the dealer.

How is residual value different from resale value?

While resale value indicates the vehicle's worth after depreciation, mileage, and "wear and tear," residual value is determined in advance and based on the MSRP.

Why is residual value important?

The higher a vehicle's estimated residual value, the more the car company thinks they can resell it for at lease-end, and the lower you will owe on said lease. Furthermore, if your lease contract has a buyout option and the vehicle's residual value is $20,000, but the resale value ends up being $23,000 at the end of the lease, you could exercise the option to buy the vehicle for essentially a $3,000 discount. If the resale value is less than the residual value, lease contract terms protect the lessee from the extra depreciation.

If you have any questions about leasing a new MINI, please reach out to South Shore at your convenience. Our friendly finance experts will be happy to assist you.

Categories: Finance, New Inventory