How to Determine the Residual Value of Your Car

Posted: Saturday, January 4th, 2020

If you’re shopping for a new car, chances are you’ve seen the term, “residual value of car” either during your research or in leasing or financing paperwork. If you’re like many St. Charles drivers, you’re probably wondering what it means and why it matters. Read on to learn more about residual value and the role in plays in buying or leasing a car in the greater St. Louis area.

What is Residual Value on a Car?

When it comes to determining the cost of a car lease or a vehicle’s resale value, residual value is an important deciding factor — or, at least it should be for you and your lender. Residual value is a car’s estimated wholesale value at the end of a lease or after a certain period of time.

How to Calculate Residual Value of a Car

Wondering how to find the residual value of a car? Here’s an easy formula to follow:

  • Residual value is determined by multiplying the MSRP by the estimated depreciation value. (For example if your car is originally valued at $20,000 and the depreciation is 50%, then the residual value would be $10,000.)
  • At the end of the lease, the residual value of the car would be $10,000.
  • If you chose to purchase the car at the end of your lease, the purchase price would be $10,000.

Residual Value: Why it Matters When Leasing

Lenders frequently use the residual value of a car to determine lease payments. When you lease, you pay for the car’s depreciation (i.e. residual value subtracted from the starting price) throughout the lease term, as opposed to its entire cost. Your lease payments will go toward the depreciation of the car, as well as any interest, taxes, and additional fees.

It’s especially important to know your a car’s residual value when leasing. If the car has a low depreciation rate, your monthly payments will be lower and at the end of the lease the residual value will be higher. This is important to know if you’re considering purchasing the vehicle at the end of the lease.

Residual Value: Why it Matters When Buying

If you own the car, determining residual value will help you better estimate the resale value. Of course, when it comes to resale value there are other factors to consider, such as the vehicle’s condition and the current market price. Independent companies such as Kelley Blue Book are a good source for finding out about depreciation and resale value. Taking good care of your car will increase both its resale price and trade in value.
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Get an Auto Loan that’s Right for Your Needs

Whether you intend to purchase or lease your next car, Green Light Auto Credit is here to help you make an informed decision. Our auto finance experts can assist you in securing the financing that suits your needs, no matter what kind of credit you may have. Call us at (800) 200-5551 if you have any questions or apply for financing online.