Next to your Capitalized Cost ("cap cost") the biggest leverage item in your lease is your Residual Price. The Residual Price is the amount the car is expected to be worth at the end of the lease. The purpose for this price is to determine how much the vehicle will depreciate during the term of the lease so that you can determine how much you owe while you are making payments.
Here's an example of the same car with two different car payments based on nothing other than the residual price difference:
| Vehicle A |
Vehicle B |
| Cap Cost |
$20,000 |
Cap Cost |
$20,000 |
| Term (months) |
36 |
Term (months) |
36 |
| Residual Price |
$7,000 |
Residual Price |
$10,000 |
| Monthly Payment (before interest & taxes) |
$361 |
Monthly Payment (before interest & taxes) |
$277 |
Notice that the Monthly Payment for Vehicle A is over 26% higher than the payment for Vehicle B. The difference is the Residual Price.
Dealers do not necessarily set residual prices. These are often set by banks that derive these numbers from statistics and reports on the values of vehicles when they are returned from leases. Companies like ALG (Automotive Lease Guide) provide these values to dealers and banks that use them as a reference point for designing leases.
You have more leverage in changing your residual price if you work directly with a leasing company versus through a dealer. The dealer will rarely present you with options on your residual price. Choosing a higher or lower residual price.
For most people, choosing the highest residual price is of no consequence to them - at the end of the lease they simply turn your vehicle into their leasing company and walk away. At that point the bank has to contend with the value of the vehicle and whether or not the residual is higher or lower than it should be.
For others who may consider buying the vehicle at lease end, a lower residual price makes the vehicle itself sound more affordable. But in reality, the consumer is just paying the difference during the term of the lease instead of at the end of the lease. It's the same amount of money, just over a different time period.
Our general recommendation would be to find the highest possible residual price that you can. Again, some lenders may adjust their residual prices to suit their own needs. Among lenders, captive leasing companies (leasing companies owned or operated by automotive manufacturers) are most likely to do this in order to drive more vehicle sales. They can afford to create higher residuals because they have the benefit of making more money in the sale of the vehicle. Independent leasing companies (those not owned by a manufacturer) do not make money on the sale of the vehicle, and therefore need to be more careful about setting higher residual values.
With a high residual, your lease end buyout price will of course be higher. We recommend a higher residual because you may or may not buy the vehicle at the end of the term, but you will certainly make the payments during the term. A higher residual gives you more flexibility during the term of the lease.
For more information about researching residuals and lending institutions, see the section entitled "Shopping for your Lease".
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