The process of car leasing is straightforward enough – you pay a monthly sum to drive a car around, usually over a two-four year period, but the car is never actually yours to own. At the end of the term you simply give the car back to the dealer, take out a new lease, or, in some cases, you might be given the option to buy.
Car leasing deals with arguably the biggest problem associated with buying a new car – the fact that the car immediately loses a large portion of its value as soon as you drive it away from the garage. Of course, the more you drive your vehicle the less it is worth but different makes and models have different depreciation rates.
Consequently, when you take out a car lease, a sum is worked out known as the ‘residual value’ – this is an estimate of what the car will be worth at the end of your lease period. Your monthly payments are then based on the manufacturer’s suggested retail price (or the price you negotiate with the dealer) minus the residual value. In other words, you pay the difference between what the car is worth when you take out the lease and what it is estimated to be worth at the end of this period.
This means that the higher the residual value of the car, the less you will pay on your car leasing deal.
