Residual vehicle value:What it is, how it differs from current vehicle value, and how to calculate loan-to-value (LTV)

Importance of residual value

Residual value is crucial because it directly impacts your monthly lease payments. A higher residual value means lower monthly payments, as the vehicle is expected to depreciate less over the lease term. Additionally, understanding the residual value helps you decide whether to buy the vehicle at the end of the lease or lease a new one.

What is residual vehicle value?

Current vehicle value, often referred to as market value or actual cash value, is the present worth of a vehicle in the market. Unlike residual value, which is an estimate made at the beginning of the lease term, current vehicle value fluctuates based on various factors such as the vehicle’s condition, age, mileage, and overall market conditions.

Key factors influencing current vehicle value

1. Condition: The physical and mechanical condition of the vehicle significantly affects its current value.
2. Mileage: Higher mileage can decrease the current value as it indicates more wear and tear.
3. Market demand: The demand for specific makes and models can raise or lower the current value.
4. Age: Older vehicles typically have lower current values due to depreciation.

Importance of current vehicle value

Knowing the current vehicle value is important for several reasons. If you’re considering buying your leased vehicle at the end of the lease term, comparing the residual value to the current value helps you determine if it’s a good deal. Additionally, the current value is essential if you’re planning to sell or trade-in the vehicle.

Differences between residual value and current vehicle value.

While both residual value and current vehicle value relate to a vehicle’s worth, they serve different purposes and are determined at different times.

Residual value

• Determined at: Beginning of the lease term
• Purpose: Estimate the vehicle’s worth at the end of the lease for calculating lease payments
• Factors: Make and model, lease term, mileage limits, market trends
• Stability: Remains fixed throughout the lease term

Current vehicle value

• Determined at: Any given point in time, usually current market conditions
• Purpose: Reflects the vehicle’s present worth in the market
• Factors: Condition, mileage, market demand, age
• Stability: Fluctuates based on various factors

Understanding the distinction between these two values helps you make more informed decisions about leasing, buying, or selling a vehicle.

How to calculate loan-to-value (LTV) for your lease vehicle.

The loan-to-value (LTV) ratio is a financial metric used to compare the amount of your auto loan to the value of the vehicle. It’s an important figure for both lenders and borrowers, as it indicates the level of risk involved in the loan.

1. Determine the loan amount: This is the amount you owe on your auto loan. If you’re at the beginning of your lease, this amount will be the initial loan value. For existing loans, it’s the remaining balance.
2. Find the vehicle's value: Use the current vehicle value, which can be obtained from resources like Kelley Blue Book, Edmunds, or a professional appraisal.
3. Calculate the LTV ratio: Use the following formula:

LTV ratio = (^{loan amount}⁄_{current vehicle value}) x 100

Example calculation

Suppose you have a loan amount of $20,000 and the current value of the vehicle is $25,000. The LTV ratio would be:

LTV ratio = (^20,000⁄_25,000) x 100 = 80%

Importance of LTV ratio

1. Risk assessment: Lenders use the LTV ratio to assess the risk of the loan. A lower LTV ratio generally indicates lower risk, making it easier to obtain favorable loan terms.
2. Equity: The LTV ratio indicates how much equity you have in the vehicle. A lower LTV ratio means you have more equity, which can be beneficial if you plan to sell or trade in the vehicle.
3. Interest rates: Loans with lower LTV ratios often come with lower interest rates, as they are considered less risky.

Managing your LTV ratio

To manage and improve your LTV ratio, consider the following tips:

• Make larger down payments: A larger down payment reduces the loan amount, lowering the LTV ratio.
• Pay off principal: Make additional payments toward the principal balance of your loan to decrease the loan amount faster.
• Maintain vehicle value: Keep your vehicle in good condition to preserve its value. Regular maintenance and avoiding excessive mileage can help.