Residual value

Definition

In car leasing terms, residual value refers to the resale value of your car at the end of the agreement.

The estimated residual value of your vehicle is calculated by the leasing company at the start of your agreement and is a key factor in determining the cost of your Monthly Payments.

How is residual value calculated?

To calculate the predicted residual value, the leasing company will use your Annual Mileage Limit and Term Length to estimate the vehicle’s Depreciation over the length of your contract.

Exceeding your annual mileage limit can impact the residual value of your vehicle, so it’s important you stick within your agreed limit. Otherwise, you’ll receive an excess mileage charge.

While this is normally only a few pence per mile, it can quickly add up.

Why is residual value important?

When you lease a car, your monthly payments are calculated based on the difference between the vehicle’s current value and it’s expected residual value, plus interest.

If you choose a car that retains its value, the difference between the purchase price and the residual value will be smaller, resulting in lower monthly payments.

For example, a brand-new car will lose around 60% of its value over 3 years, so its residual value will be significantly lower compared to the cost of the vehicle at the start of the agreement.

A used car on the other hand, will depreciate at a slower rate, so the difference in value will be smaller.

Residual value and GFV

With Personal Contract Purchase (PCP), you’re essentially leasing the car over an agreed period, but at the end of your contact, you have the option to pay a Balloon Payment to keep the vehicle.

This figure is based on the residual value and is often referred to as the Guaranteed Future Value, as it will not change regardless of the market value of the car at the end of the contract.