What a lease is, essentially, is paying for how much value the car loses over the time you have it. Why does this matter to you? Your lease payment is basically the depreciation, split up over 36 months, with some fees and interest added in. It’s also not negotiable, but the specific residual value can vary from lessor to lessor.
They use a lot of data to calculate it, so it’s not a wild guess. Instead, lessors use an artificial depreciation percentage, which is the residual value. So, your lessor won’t use actual value to figure out how much your car depreciates and what it should be worth at the end of your lease.
Maybe there are way too many cars like yours all coming off their leases at the same time, flooding the market. Now, every car is different, and the real value of a car in 36 months is hard to predict. Over three years, the car has lost $8,130 in value. So, after three years, it’s worth $21,870. It depreciates 10 percent each year in actual value. Let’s say you lease a car that’s worth $30,000. It’s what the car is worth at the end of 36 months, when you factor in how much value it has lost being three years old ( depreciation is the technical term). The price you would pay for that car is called the residual value. Remember, at the end of a 36-month lease, you have two options: you can return the car to the dealer and walk away, or you can buy the car. They’re easy to understand and affect you directly.īut how is the monthly payment calculated? This is where the residual value comes in. When you lease a new car, it’s easy to focus on the two numbers that matter most to your bank account: the monthly payment, and the amount you have to put down. This is part of our Car Buyer’s Glossary series breaking down all the terms you need to know if you’re buying a new or used car from a dealership.
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