Residual Value
A leased car's projected value at lease end. Set by the leasing company; affects monthly payment.
Residual value is the leasing company's prediction of what your car will be worth at lease end (e.g., 60% of MSRP after 36 months). Higher residual = lower monthly payment because you're paying for less depreciation. Residual values are set by the leasing company and not really negotiable, but you can shop different leasing companies for the same car — some have higher residuals than others.
01Is the residual value negotiable?
No. The leasing company sets it, and every dealer quoting the same car, term and mileage through the same lender should show the same percentage. If two quotes on the same spec show different residuals, ask why in writing. It usually means a different term, a different mileage allowance or a different lender.
What matters for you is knowing the residual percentage so you can check the dealer's payment math.
02Why the residual is based on MSRP, not your price
Residuals are typically calculated as a percentage of the car's MSRP, not the price you negotiated. So when you negotiate the cap cost down, the residual stays the same, and the gap between them, the part you pay for, shrinks. That is why price negotiation hits a lease payment so directly.
Dealer add-ons are typically not part of the MSRP the residual is based on. If a dealer adds a package to the cap cost, you pay for all of its value over the lease and it does not raise the residual to offset it.
03A worked example
Say a car has a $40,000 MSRP, a cap cost of $38,000, a 36-month term and a money factor of 0.00125. At a 58% residual ($23,200), the depreciation fee is $411.11 and the rent charge is ($38,000 plus $23,200) times 0.00125, or $76.50. That is $487.61 a month before tax.
Now say you pick a higher mileage allowance and the residual drops to 55% ($22,000). Depreciation becomes $16,000 divided by 36, or $444.44. Rent charge becomes $60,000 times 0.00125, or $75. The payment is $519.44, about $31.83 more a month.
04What the residual means at lease end
The residual is usually your buyout price at the end of the lease, plus any purchase option fee in your contract. If the car is worth more than the residual when the lease ends, you may have equity you can use. If it is worth less, you can usually just hand it back and pay only what your contract specifies, such as the disposition fee and any excess mileage or wear.
05Questions buyers ask
Is a higher residual always better?
It lowers your payment, so for a lease you plan to return, usually yes. If you plan to buy the car at lease end, a higher residual means a higher buyout price.
Why do two similar cars with the same price have different lease payments?
Often it is the residual. A car the lender expects to hold its value better gets a higher residual, so you pay for less depreciation. That is why a pricier car can sometimes lease for less than a cheaper one. Our lease vs. buy breakdown shows how this plays out.
Can I change the residual by choosing a different term?
Yes. Residuals vary by term and mileage allowance. Ask the dealer to quote the lease at two or three terms so you can compare the payment, the total cost and the residual for each.