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Trying to sell your lease after you’ve decided to move on from your car? Or are you wanting to buy out your car from the lease to gain full ownership? If so, you’re in the right place!
There are several factors at play when it comes to buying out or selling your lease that you need to be aware of, and CoPilot is here to help teach you everything you need to know. In this article, we’ll explain the meaning and importance of your lease’s residual value, as well as how to calculate it and how to use this information to your advantage.
Understanding residual value
The residual value of your lease is essentially an estimation of how much your leased vehicle will be worth after it depreciates over the period of your lease. Your leasing company will determine this at the beginning of your lease, but how, exactly, this is determined will depend on many factors and can vary from dealership to dealership. However, residual value calculations are typically affected by things like fluctuations in gas prices, market changes, and technological innovations.
One of the most important aspects of the residual value is the fact that it directly affects your monthly payments for the lease. Generally, the less depreciation that the lessor expects for your vehicle, the lower your monthly payments will be. On the other hand, if your lessor calculates a low residual value at the end of your lease, payments may be a little higher.
If you opt to buy your leased vehicle at the end of the lease, you’ll be paying the residual value, so it’s important to be aware of this number. However, if you are simply returning your lease, the residual value’s role may get a bit more complex. We’ll touch more on this later.
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How to calculate your car’s residual value
Leasing companies have the power in calculating and deciding the residual value of your car, and it’s not always clear exactly how they arrive at their numbers. The idea, though, is that they’ve done enough research to determine how much your car will depreciate over the term of the lease and use this to estimate the value of the car at the lease’s end.
Understanding the set residual value in your lease contract is crucial, but thankfully it’s also easy. These values are typically expressed as a simple percentage of the vehicle’s Manufacturer Suggested Retail Price. For example, if you’re leasing a Subaru Forester that has an MSRP of $40,000, and your residual value is set at 50%, then the residual value at the end of the lease will be $20,000.
Figure out your equity
While lessors have their own logic behind setting a car’s residual value, it doesn’t mean they’re always right. A multitude of things, such as an increase in market demand or a minuscule amount of wear-and-tear can happen over the course of your lease that can affect your car’s value in unexpected ways.
At the end of your lease, you should do your own research to find the current market value of your car, which you can do with CoPilot. Our CoPilot Compare tool will show you side-by-side comparisons of a vehicle’s original MSRP with its current market value.
This information will allow you to make an informed decision about how to end your lease. If the car’s been undervalued and its residual value is lower than the current market value, you can reap the difference in profit.
But regardless of what you do, having this information ready gives you the upper hand.
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How your residual value will affect your lease
At the end of the day, your residual value is what determines your monthly payments over the lease’s term, so its effects are felt throughout the lease.
It can also affect the end of your lease in different ways, however, depending on the type of lease you have and what you plan to do with the car. If you’re simply returning the car, then you’ll want to know whether you have a closed-end lease and open-end lease.
Closed-end leases are basically a sealed deal; the car’s residual value is firm and if the car winds up worth less at the end of your lease than the residual value, it doesn’t matter. In an open-end lease, however, there’s a decent chance that you’ll have to pay the difference between the residual and market values, so be wary of this when you enter into a lease agreement.
In the event that you plan to buy out your lease, the residual value is what you’ll pay for the car. If you’ve done your homework and researched your car’s equity, you’ll have an advantage. Your car’s market value may be higher than the residual, meaning you’re getting a great deal if you buy out the lease. From here, you can sell the car yourself and take the profits, or just keep your car with the knowledge that you bought it at an excellent price.
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Want to trade in your lease?
One popular practice in car leasing is trading in your lease and using that money to fund your next car. If your lease is up and your car has equity, you can trade in your lease and use the difference between the car’s actual market value and residual value to go towards your next lease or purchase.
It’s inadvisable to trade in your lease at the beginning because very little depreciation will have happened and you won’t get a good deal. Some leases allow trade-ins towards the end of the lease (but before it’s ended), which could wind up being profitable, depending on your car’s value.
The most important thing to keep in mind, regardless of what you do, is the price difference between the residual and market value of your vehicle. Always use this to help you decide your next move.
Get a curated list of the best used cars near you
The CoPilot car shopping app is the easiest way to buy a car. Tell us what you’re looking for (like a certain trim level) and we’ll search the inventories of every dealership in your area to make you a personalized list of the best car listings in your area.
Only looking for newer models? CoPilot Compare is the search engine for nearly-new cars. You’ll only see cars 5 years or newer with low mileage, making CoPilot Compare the best way to find off-lease, early trade-in, and CPO cars.
The best part? CoPilot is built using the same technology that dealerships use to buy and sell their inventories, so we have more info on each vehicle than competitors. CoPilot doesn’t work with dealerships, so there are no sponsored posts or other shady practices— just the most info on the best cars. Check out our About Us page to learn more about how CoPilot works.