A lease is a financing method in which the customer only pays for a portion of a vehicle's cost. That portion is paid in monthly payments over the term of the lease.
The portion of the vehicle’s cost that is not paid by the customer is called the residual value.
The relationship between the price of the vehicle and its residual value at the end of the lease term is important in leasing, because it determines how much the customer will pay.
How is the cost of a lease calculated?
Start with the negotiated selling price of the vehicle, also called the capitalized cost. From that number, subtract the residual value. This equals the lease amount. Multiply the lease amount by the lease factor to get the total lease cost.
What is a ''lease factor''?
The ''Lease Factor'' determines how much the customer will pay in lease charges over the life of a lease. It is similar to the interest rate charged on a purchase loan.
What is the ''lease term''?
The period of time for which a lease agreement is written is called the Lease Term. Business customers typically have several options available at the end of their lease terms.
What are the options at lease termination?
End of Term Options:
- Purchase vehicle for residual amount specified in lease agreement
- Extend lease by financial residual value
- Turn in the vehicle
What factors affect how the lease residual is calculated?
The residual value depends on several factors, including the...
- Expected average annual mileage
- Expected use
- Number of months in the lease
- Make, or model vehicle, and...
- Resale history of similar make vehicles.