A leased vehicle is similar to a rented vehicle. However, you need to make a long-term commitment that may range anywhere from one to five years. So, it pays to read the fine print when leasing a vehicle just as you would if you were getting an auto loan.
As the lessee, you should pay close attention to the terms used in the car lease contract and know the difference between these terms so that you can make an informed decision about your financing options.
Residual Amount of the Leased Vehicle
One of the most important terms in a leasing agreement is the “residual amount” or “residual value” at the end of the lease. According to the Virginia DMV, the residual value is the amount of money that the vehicle is worth at the end of your lease term.
Typically, the residual value is calculated based on the estimated wholesale value of the car, as projected by the manufacturer, after depreciation based on specified mileage limits has been accounted for and your payments have been considered.
For example, according to Kelley Blue Book, a 2022 Buick Enclave has a base retail price of $43,995. However, at 24 months, the residual value may be about $30,365.35, which is 69 percent of the original value. And at 60 months, the residual value will only be $17,483.61 or 39.7 percent of the car’s original value.
It is worth noting that the residual value of the car is often less than the actual retail value of the car due to depreciation, which means that you could get a great deal on the vehicle if you decide to buy it at the end of your lease.
Depreciation of Leased Vehicle
As the Federal Trade Commission explains, 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, number of miles driven 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 car 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 doing a lease-end buyout or opting for an early lease buyout. But 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.
Retail Value of a Car
The retail value of your car is the amount that the new 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 as the purchase 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.
Payoff Amount for a Leased Car
Similar to the residual value, the payoff amount or early buyout amount is the actual value of the leased car you would pay if you were to buy it before the end of your lease. Theree payoff amount is calculated by considering the car’s projected residual value plus the amount that you still owe on it, including any interest. The latter depends on the specified interest rate.
For example, suppose you were to lease a 2022 Buick Enclave for five years – 60 months. In that case, the projected residual value would be $17,483.61 at the end of your lease. But if you were to buy the vehicle before your lease ended and you still owed $5,000 in total monthly payments, your car lease buyout amount would be $17,483.61 plus the $5,000 in remaining lease payments that you agreed to in your lease contract.
So, in the end, it would cost you $22,483.61 to buy the vehicle. The buyout price may or may not be specified in your lease agreement or monthly leasing statement, so you might need to call your leasing company to get an up-to-date quote on the actual value of the vehicle.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.