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. 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 you want to purchase the 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.