How Depreciation Affects a Car Lease

How Depreciation Affects a Car Lease

A number of factors go into establishing the cost of a lease. One of the most significant is the quoted residual value of the car.  In the simplest possible terms, residual means what’s left after a portion of something has been used up. Read more at arkconsolecommands

In the case of a car, it’s how much of the car’s original value remains at the end of the lease term — assuming certain mileage and maintenance requirements are met. Now, if you’re good at looking ahead, you’ve probably guessed a car’s residual value is a function of depreciation, which is how depreciation affects a car lease.

How Do Residuals Work?

As we mentioned above, the residual value of a car is what it is expected to be worth after a certain number of years, with a certain number of miles on it and in as near pristine condition as possible. Read more here.

Here’s the thing though, you’ll be hard pressed to find the residual value of a car before you go in to discuss leasing it. You can sometimes infer it based upon leasing offers manufacturers run, but that’s generally as close as you’ll get out here in the real world.

This is due in part to the fact that some leasing companies assign different residual values to their cars than others.  Read about sod cutter

What Does This Have to Do with Your Lease?

Simply put, the residual is a function of the estimated rate of depreciation the car will experience. This, in turn, figures into the amount of the monthly payment you’ll make to lease the car.

Your credit score (the higher the better), the length of the lease (usually anywhere between two and four years), the negotiated sale price of the car and its residual value are the key elements used to determine a lease payment.

Here, it really does help to understand how leasing a car works.

Your credit score comes into play when the interest rate being applied to the transaction is calculated. The better your credit score, the lower your interest rate, so the payment will be lower too. Short-term leases leave more value in the car, so the residual value will be higher, which will make the payment lower. Low mileage also leaves more value in the car, which can boost the residual value and lessen the payment.

How Depreciation Figures In

Fewer miles mean less wear and tear, which means the car will be worth more (depreciates less). A shorter lease term also means the car will be worth more (depreciates less).

Both of those factors are key to establishing the residual value of the car, which is a function of how much depreciation the car is anticipated to experience over the life of the lease. Simply put, the less the car is expected to depreciate, the lower your monthly payment will be.

Here’s an Example

To keep the math simple, let’s say you’re looking at a car with a price tag of $50,000. You’re going to lease it for 36 months, keeping the mileage at or below 12,000 miles annually. The depreciation rate of the car is calculated to be 50 percent if all of those parameters are met. This means the leasing company expects the car to have a residual value of $25,000 when you bring it back.

In turn, you’ll be asked to pay the $25,000 in value the car will lose (the depreciation) as you’re driving it over those three years. Instead of making payments on $50,000 as you would if you bought the car, you’ll be making payments on $25,000 (all other things being equal).  Read more lawn aerator

Assuming you make a down payment of 20 percent of the purchase price, you’ll be paying off $40,000 over three years at the rate of $1,111 monthly. (We’re leaving interest out to make the math easy.) However, your monthly lease payment will be $416.67 (assuming you make the same down payment of $10,000). This is because you’ll only pay the depreciation the car experiences, rather than the entire purchase price of the car.

Which is how depreciation affects a car lease.

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