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What is the Residual Value of a Car?
●February 16, 2021●4 minute read
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When looking into financing a new car, there are an array of options available to you. If you’re considering leasing as a car finance option, it is important to understand what the residual value of a car is and how this can impact you financially.
What is residual value?
If you choose to lease a car, the ‘residual value’ is the value of the vehicle at the end of your lease term. Typically, cars depreciate significantly over time, especially when they are close to new. After leaving the dealership with a car, it immediately depreciates. After 3 years, you can lose up to 58% of your car’s initial value.
There are a few reasons your car will lose its value over time, including but not limited to:
- Make and model
How does your car’s residual value affect your lease agreement?
Lenders know that cars depreciate over time. They will typically calculate your lease repayments in correlation with the loss in value that is expected to occur over your loan term. To make up for this, often additional costs are built into the lease amount that is charged.
If you have arranged to purchase the vehicle at the end of your lease term, the amount you pay is typically based on the residual value of the car. This payment is often referred to as a ‘balloon payment’ or ‘lump sum payment’.
The minimum residual values of leased cars were determined by the ATO in 2002 in the following table:
|Term of lease||Minimum residual value|
How does residual value affect my monthly payments?
Typically, your monthly payments are determined by the difference between the total amount you owe and the final sale price spread across the length of your lease. Not sure how to calculate the residual value of a car? An example of this can be seen below:
$15,000 total lease cost / 36 months = $416.67 monthly payment
How is residual value calculated (for leases)?
Companies like ALG usually forecast a vehicle’s residual value by expressing it as a percentage of the MSRP (Manufacturer’s Suggested Retail Price). Here is an example using a car worth $30,000:
$30,000 MSRP * Residual Value of 50% = $15,000 value after 3 years
An older vehicle with more miles and more damage will be worth less, and vice versa. It’s essentially just an equation with the MSRP as an interchangeable factor.
Is a high residual value important?
Cars with the highest residual value mean that the difference between the final sale price and the car’s projected worth is lower, meaning that the amount you owe on your lease is less.
Oppositely, a low residual value car means that the amount you owe on the lease is more. This could be advantageous for you if you write off the vehicle for business or decide to purchase it at the end of your lease term, but typically, a high residual value is a better financial option.
Cars that have a high residual value
Most recently, Subaru won the ALG Residual Value Award for ‘top mainstream brand’, with Land Rover taking the award for the top luxury brand. For the full list of segment winners, check out the ALG Vehicle Awards 2020.
What is a novated lease residual value?
A novated lease for a car is an arrangement between you, the car seller/lender, and your employer where your lease payments are taken from your salary pre-tax. This can mean that the car’s residual value may be a significant factor in determining your repayments. This can also impact your final payment to buy the vehicle outright (if you decide to purchase it at the end of your lease term).
What’s the difference between residual value and resale value?
Resale value refers to the vehicle’s worth after depreciation, mileage, and any damage. The residual value is pre-determined and based on the MSRP, however, the resale value can change depending on market conditions.
What are my other car finance options?
If you don’t think a lease will be a great fit for you, you could consider a car loan. At Jacaranda Finance, we offer car loans online up to $35,000 for both new and used cars. Our repayment terms are flexible, from 1 to 4 years, so you can repay your loan as quickly or slowly as is comfortable. The best part: you own the vehicle straight away. Your repayments are simply to repay the money you borrowed to fund the purchase.
Before you purchase the car of your dreams, it is always helpful to get a car valuation. If you’d like more information about our car loan costs, refer to our car loan interest rates page. Not sure exactly how a car loan works in Australia? We have you covered with our helpful blog.
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Written by Jacaranda Team