RESIDUAL VALUE: Find out how you can pay lower rates!

Date: 04.06.2020
Author: Monica Dona

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Are you thinking of renting a car? Then, you need to find out in detail about all the implications of this way of financing and study in depth the offer received from the leasing company, to make sure that you sign the contract knowing all the facts thoroughly. A very important aspect to keep in mind is the residual value because it definitely influences the amounts you have to pay during the contractual term.

If you go for operational leasing , you will not have to deal with this because the good is returned to the  leasing company   at the end of the contract. But, if you chose financial leasing, in addition to the advance  you need to pay when concluding the contract, you will have the expenses represented by the residual value, and, depending on this amount, the monthly installments will increase or decrease.

You need to have a very clear picture of what the residual value means in a lease because it varies depending on certain factors and there are several ways to determine the amount as well as how to pay. So, pay attention to this contractual element to use it to your advantage.

Table of Contents

1. What is the residual value of a lease?

The residual value is the amount in exchange for which, at the end of the leasing contract, the lender transfers ownership of the property to the user.

So, if you are interested in the residual value in the case of a car lease, this is the amount you have to pay to the leasing company to become the owner of the car. It is not an additional cost that you have to worry about, it is only a part of the purchase price of the car.

Thus, unlike operational leasing, which involves only a lease, in the case of financial leasing, by paying the residual value, you become the owner of the vehicle for which you paid installments for several years.

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2. When is the residual value paid?

The residual value can be paid at the end of the leasing contract, after the payment of the last installment or during the contract, in this case, being included in the amount of the monthly installments.

When signing the leasing contract, you will establish together with the leasor the residual value and you will choose when to pay it. Thus, if you want to have no debt at the end of the contract period, you can pay monthly, in addition to the leasing rate, part of the residual value. Instead, if you anticipate that in a few years, as long as the lease lasts, you will have a significant amount of money, you can choose the option of a higher residual value due at the expiration of the contract, thus having lower monthly installments.

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3. How is the residual value calculated?

The residual value is calculated as a percentage of the purchase price of the good.

If you are aiming to conclude a lease, and the monthly rates are as low as possible, it is very important to calculate the residual value for your benefit.

So, in order to pay the lowest possible installments during the contract, you have two options you can apply individually or together:

  • you can pay a larger advance payment, at the time of concluding the contract, in order to reduce the financial effort during the contractual period;
  • you can choose to pay, at the end of the lease, a higher residual value, thus influencing the monthly installments, the amount of which will decrease.

On the other hand, if you no longer want to worry about a payment at the end of the contract, you can choose to include this amount in the monthly installments, and thus you will become the owner of the goods after paying the last installment.

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4. Frequently asked questions and answers about the residual value

    1. Who determines the residual value?

    At the time of concluding the contract, you will establish, together with the leasing company, the percentage of the price of the good that represents the residual value.

    1. How is the residual value affected by the duration of the contract?

    If you conclude a leasing contract for a longer period, it means that you will pay more installments, and the good’s life cycle will decrease, so at the end of the contract, you will have to pay a lower residual value. .

    1. Can the residual value be 0%?

    Yes, this is possible if the residual value is fully included in the leasing rates.

    Therefore, now that you know what the residual value is and how it is established, you can conclude the lease, so that you benefit from lower monthly installments, which do not affect your standard of living that you have become accustomed to.

    Photo source: unsplash.com

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