Car Lease Deals: What is a Residual?

If you’re considering leasing a car, one of the most important concepts to learn is that of residual value. Typically expressed as a percentage, a residual value measures the depreciation of a vehicle over time.

If you lease a $15,000 car with an estimated 36-month residual of 50 percent, for example, that means that your vehicle will be worth $7,500 when you return it to the dealer in three years – and that your lease will add up to the difference (in this case, also $7,500).

It’s impossible to know how well a particular make or model will fare over time, but residuals reflect the auto industry’s best guess based on previous resale data. When you lease new cars, the residual decreases most rapidly during the first few months, which is why long-term leases are more cost-effective for the consumer.

Generally speaking, people tend to think that European and Japanese cars have higher residual percentages than American cars, meaning they are worth more at the end of car leases. Of course, you should research the projected residuals of the specific makes and models you are considering. A good rule of thumb is to only look for car lease deals with residual values of 50 percent or higher at the two-year mark.