What is a lease residual?

9th Nov 2009 by Michael Haltman

The lease residual is the amount that you could pay, once the term of the lease is over, to own the product you have been leasing. The example most people would be familiar with is the residual at the end of a car lease. This is the amount that you could own the car for.

As an example, if a residual on a BMW convertible is $17,000 after a 3 year lease, it would have to be determined if a 3 year old BMW convertible with 36,000 miles is worth that number, more or less. If the car is worth more, then you would consider buying it and either using it or flipping it to another buyer at a higher price. If it is worth less, you would walk away and the dealer or leasing company now has to sell that car potentially taking a loss on it.

Setting a residual value is by no means an exact science, and in unforeseen situations like gas spiking up in price, leasing firms got very hurt on SUV's because they would all come back at lease end, and there was no market to sell them in so prices had to be slashed.

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com