Residual Value Explained

Residual Value is the value of a car at the end of a finance agreement. To find out more about what is meant by residual value and how it is calculated, read the following guide.

Creditplus Definition of Residual Value

Residual Value refers to the value of the asset (in this case a car) at the end of the finance agreement. It is calculated by car finance companies when they are arranging the finance for a vehicle and is based on information offered by trade guides. This information takes into account depreciation, mileage and assumes that the car is in average condition for its age. When you take out a car leasing agreement such as contract hire, there is a mileage limit set which helps to ensure that the predicted residual value of the vehicle is maintained. If the mileage limit is exceeded, there is usually a fee of a few pence per mile over the limit payable.

Choosing a car that has a good residual value is key to getting the best car finance deal when you take out any kind of car leasing agreement, including PCP and Contract Hire. When you take out a car leasing agreement, the monthly repayments are calculated based on the difference between the cost of the car at the start of the agreement and the predicted residual value at the end of the agreement. Therefore, if your car has a low rate of depreciation, you will get a better deal than if your car has a high rate of depreciation.

When you take out a PCP or Lease Purchase agreement, you will be told the Guaranteed Future Value figure. This amount is based on the predicted residual value but remains a fixed amount due for payment as a balloon payment if the customer decides they want to purchase their car, regardless of the actual market value of the car at the end of the contract. In a PCP contract, if you decide to part exchange the car at the end of the contract, the price you will get for it will be the actual market value at that time, and not the residual value or guaranteed future value.

Wikipedia Definition of Residual Value

"Residual value is one of the constituents of leasing calculus or operation. It describes the future value of a good in terms of percentage of its initial value.

Example: A Honda is sold at a list price of $20,000 today. After a usage of 36 months and 50,000 miles its value is contractually defined as 50% or $10,000. The credited amount, on which the interest is applied, thus is $20,000 present value minus $10,000 future value.

Residual values are contractually dealt with either in terms of closed contracts or open contracts."

Source: Residual Value at Wikipedia.org

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