leasing broker

Residual Value

10.06.2019 Written by Tanushev

The residual value is present in almost all leasing transactions. For operational leasing and open-end financial leasing, the residual value is compulsory.

The residual value represents a forcast of the market value of the leasing asset at the end of the leasing term. Simply said – it is the price at which the returned leasing asset may be remarketed (the above types of leasing stipulate that the leasing asset must be returned to the lessor). “The forecast” is done by the lessor and is used to determine the amount of the monthly lease installments. The greater the residual value, the smaller the monthly installments.

It may also be said that the residual value is the part of the purchase price which will never be paid by the lessee.

As the lessor determines the residual value, it is logical, that more often than not, they will be more conservative by reducing the residual value (e.g. “a 30% residual value for leasing of a car for 3 years”). Hence the residual value may be the object of negotiation between the lessor and the lessee.

The only leasing transactions without a residual value are the full-pay-out financial leasing contracts where the residual value is either zero or an insignificant amount.