When most people shop for a car, they obsess over the purchase price. But when you are leasing, there is a number that is arguably far more important: the Residual Value.
Understanding residual value is the secret to finding the cheapest lease deals on the market, even on luxury cars.
What is Residual Value?
The residual value is the estimated value of the car at the end of the lease term. It is set by the leasing company (the bank or captive lender) and is expressed as a percentage of the car's MSRP (Manufacturer's Suggested Retail Price).
For example, if a car has a $50,000 MSRP and a 60% residual value for a 3-year lease, the car is expected to be worth $30,000 at the end of the lease.
Why High Residual Values Mean Lower Payments
When you lease a car, you are essentially just paying for the depreciation that occurs while you drive it. The formula is simple:
Depreciation = Capitalized Cost (Negotiated Price) – Residual Value
If you lease a car that holds its value well (a high residual percentage), the gap between the purchase price and the residual value is smaller. Therefore, the depreciation portion of your monthly payment is drastically lower.
Can You Negotiate Residual Value?
No. Unlike the purchase price and the money factor, the residual value is strictly set by the bank. The dealer has absolutely no control over it and cannot change it.
Because you cannot negotiate it, the best strategy is to target vehicles that inherently have high residual values. Cars from brands like Toyota, Honda, Subaru, and Lexus historically feature exceptional residuals, making them some of the cheapest vehicles to lease relative to their MSRP.
Use It to Buy Your Car
The residual value is also your "buyout price" at the end of the lease. If you love the car and want to keep it, you can purchase it for exactly the residual value, regardless of what the actual market value of the car is at that time!