When leasing a vehicle, pay attention to the terms used in the lease agreement and know the difference between these terms so that you can make an informed decision about your financing options.
One of the most important terms in a leasing agreement is the “residual amount” or “residual value.” The residual value is the amount of money that the vehicle is worth at the end of your lease term. The residual value is calculated based on the estimated wholesale value of the car, as projected by the manufacturer, after depreciation has been accounted for and your payments have been considered. For example, this calculator shows that a 2014 Buick Enclave 2WD has a suggested retail price of $39,830. At 24 months, the residual value is only 58 percent of the original value, or $23,250. By 60 months, the residual value is only 30 percent, or $12,200.
The residual value is often less than the actual retail value of the car, which means that you could get a great deal on the vehicle if you decide to buy it at the end of your lease.
The retail value of the car is the amount that the car would be worth if it were sold for the recommended price by the manufacturer. The retail price is often quoted to show you the difference between what you are paying and what the car would be worth if you bought it elsewhere. While the dealership will most likely quote the manufacturer’s suggested retail price, you can use other sources, such as the Kelley Blue Book, to get a good idea of how much the car would sell for on the open market.
Similar to the residual value, the payoff amount is the amount of money that the car would be worth if you were to buy it before the end of your lease. The payoff amount is calculated by considering the projected residual value of the car plus the amount that you still owe on it, including any interest. For example, if you were to lease a 2014 Buick Enclave 2WD for five years -- 60 months -- the projected residual value would be $12,200 at the end of your lease. If you were to buy the vehicle before your lease ended and you still owed $5,000 in total payments, you would have to pay the $12,200 plus the $5,000 in remaining payments that you agreed to in your lease, which means that it would cost you $17,200 to buy the vehicle. The payoff amount may or may not be specified in your lease agreement, so you might need to call your leasing agency to get an up-to-date quote on your current payoff amount.
Another important term that’s mentioned frequently throughout a lease agreement is depreciation -- the amount of value that the car loses over time due to normal wear and tear and market fluctuations, such as supply and demand. If the model of your car is very popular, for example, it could lose value simply because there are many other people and dealerships trying to sell the same item and offering competitive prices.
The leasing agency can’t know for sure what the future depreciation value will be at the end of your lease term, however, so it has to make an educated guess. If the leasing company guesses that the car will depreciate faster than it does, then you could get a great deal by buying the vehicle at the end of your lease agreement. If it guesses that the car will depreciate slower than it does, though, then it would be better to let it go back to the dealership and buy the same model from a private seller at a lower price.