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Why vehicle value over time matters
Most people know that depreciation matters when it's time to sell or trade a vehicle for another one. But, did you know that depreciation also matters when it comes to leasing?
Leases and depreciation
When it comes to calculating lease payments, the formula focuses on the estimated value of the vehicle at the end of the lease term - also known as the residual value. Specifically, the largest portion of a lease payment will be determined by subtracting the residual value from the selling price; this means that the higher the residual value of the vehicle, the lower your monthly lease payment will be.
Let’s take a closer look to see how this works.
For our example, we’ll say that you’re considering a 36-month lease on a vehicle with an MSRP of $25,000 and a residual value of 60%. Calculating 60% of the MSRP means that this vehicle would be worth $15,000 at the end of the lease term. With this amount in mind, we subtract it from the selling price, which you negotiated to $23,000:
$23,000 - $15,000 = $8,000 base payment
Then, we divide the base payment by the number of months in the lease term:
$8,000 / 36 months = $222.22 per month (plus taxes and fees, etc.)
To give you a comparison, let’s say that you were again considering a 36-month lease on a vehicle with an MSRP of $25,000, but this time the residual value is 45%. Now, when you calculate 45% of the MSRP you see that this vehicle would be worth $11,250 at the end of the lease term. If you negotiated the selling price again to $23,000, your calculation would look like this:
$23,000 - $11,250 = $11,750 base payment
Once again, we divide the base payment by the number of months in the lease term:
$11,750 / 36 months = $326.39 per month (plus taxes and fees, etc.)
Comparing the two options, it’s clear to see that the first vehicle option, with the greater residual value, means a savings of $104.17 each month on the base payment portion of your lease - over the span of 36 months, a savings of $3,750.12!
A wise decision with Toyota
Did you know that the average new car loses 40% or more of its value in the first three years?
That’s according to depreciation research by Edmunds and CarFax, but there is a bright side according to additional reports. In a 2019 study of more than 7.7 million new and used car sales (model years 2014-2019), data shows that “as a brand, Toyota vehicles have the best resale value… [and] Toyota vehicles hold their value across all vehicle segments thanks to the brand’s reputation for reliability.” For leases, which are commonly based on three-year terms, this is an important distinction - as we just learned, because the better a vehicle holds its value, the less you’ll pay to lease it.
...data shows that “as a brand, Toyota vehicles have the best resale value… [and] Toyota vehicles hold their value across all vehicle segments thanks to the brand’s reputation for reliability.”
The study, by iSeeCars.com, goes on to name some specific models that retain more of their value and depreciate less than average, like Toyota’s Tacoma, Tunda, and 4Runner models. When it comes to the best resale value, Toyota’s 4Runner, RAV4, Highlander, and Land Cruiser made the list in the SUV category, while the Tacoma and Tundra were named in best resale value for trucks. Hybrids making the list of best resale value include Toyota’s Prius C, Prius, and Camry Hybrid.
The good news continues with research provided by Kelley Blue Book (KBB) which named three Toyota models on it’s 10 Best Overall Resale Values for 2020 models: the 4Runner - taking the list’s fifth spot, Tundra - named in the third spot, and Tacoma - taking KBB’s number one spot in resale value for the sixth year in a row! These same models were also listed in Road and Track’s New Cars That Depreciate Least and AutoGuide’s Top 10 Cars That Hold Their Value.
Without a doubt, choosing the best vehicle brand for retaining value is important whether you’re leasing, financing or purchasing a new car outright. We think it’s safe to say that no matter which Toyota model you’ve chosen to lease, you’ve made an excellent choice based on overall best resale value! Not to mention, you’re protecting yourself from fluctuations in market conditions because your lease has a guaranteed residual value.
Congratulations on your decision!