Q:

How is the residual value of a new car determined?

A:

Most leasing companies determine the residual value of a new car by using the Automotive Lease Guide as a starting point. The ALG publishes a Residual Percentage Guide that states each vehicle's predicted wholesale value after two, three, four and five years.

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The wholesale value of a car is the price it typically commands at auction. Auctions are how some leasing companies dispose of their vehicles after the lease for them ends.

While the residual value is shown as a dollar figure, it is calculated as a percentage of the Manufacturer's Suggested Retail Price. The residual value is the estimated value of the car at the end of the lease. It is the price at which the car can be bought from the leasing company and is always stated in the Lease Contract. For example, if a car's MSRP is \$30,000 and its residual value is 50 percent after 24 months, the car has a residual value of \$15,000 at the end of the lease.

To view the latest ALG residual values, a one-year subscription to the ALG website can be purchased. Alternatively, there are some leasing software programs available, such as Expert Lease Pro, that contain the latest ALG residual values.

Most companies use ALG as their main guide. However, the residual values they quote are often a few percentage points higher than what ALG quotes. This is because many manufacturers subsidize their leases and artificially raise the values in order to lower the lease payments.

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