The residual value of a leased asset is one of the most important factors in determining your monthly payment. For a car lease, the calculation is straightforward, as it is always based on the vehicle’s initial price, not the negotiated selling price.
How to Calculate Residual Value on a Car Lease
The residual value is the estimated wholesale worth of the vehicle at the end of the lease term, as determined by the leasing company or financial institution.
The standard formula for calculating the residual value for a car lease is:
Residual Value=MSRP×Residual Percentage
Breakdown of the Terms
| Term | Definition | Impact on Payment |
| Residual Value | The dollar amount the vehicle is projected to be worth at the end of the lease. It’s the price you would pay if you choose to buy the car at that time (the “buyout price”). | Higher Residual Value → Lower Monthly Payment. |
| MSRP | Manufacturer’s Suggested Retail Price. This is the sticker price of the car. The residual value is always a percentage of the MSRP, not the capitalized cost (your negotiated price). | The starting point for the calculation. |
| Residual Percentage | A percentage set by the leasing company (the bank) based on the vehicle make, model, trim, lease term, and annual mileage allowance. It typically ranges from 45% to 65% for a 36-month lease. | Higher percentage means the car is expected to depreciate less, leading to a higher residual value. |
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Example Calculation
Let’s use a real-world example to see how the residual value is calculated and how it affects the monthly payment.
Scenario Details
| Factor | Value |
| MSRP (Manufacturer’s Suggested Retail Price) | $40,000 |
| Lease Term (in months) | 36 months |
| Residual Percentage | 60% (or 0.60) |
| Negotiated Price/Capitalized Cost (after discounts) | $38,000 |
| Money Factor (Interest Rate) | 0.00125 |
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Step 1: Calculate the Residual Value
Residual Value=MSRP×Residual Percentage
Residual Value=$40,000×0.60=$24,000
Step 2: Calculate the Monthly Lease Payment (Simplified)
The total monthly payment is the sum of two parts: the depreciation fee and the finance fee (rent charge).
| Component | Formula | Calculation | Monthly Cost |
| Monthly Depreciation Fee | Lease TermCapitalized Cost−Residual Value | 36$38,000−$24,000=36$14,000 | $388.89 |
| Monthly Finance Fee (Rent Charge) | (Capitalized Cost+Residual Value)×Money Factor | ($38,000+$24,000)×0.00125=$62,000×0.00125 | $77.50 |
| Base Monthly Payment (Before Tax) | Depreciation Fee + Finance Fee | $388.89+$77.50 | $466.39 |
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Why Residual Value is Critical
- You Pay for Depreciation: When you lease, you are only paying for the difference between the Capitalized Cost (your price) and the Residual Value, plus interest.
- Higher is Better: A vehicle with a high residual percentage (meaning it’s projected to hold its value well) will always result in a lower monthly payment than an identical car with a low residual percentage, assuming all other factors are equal.