You’ve likely heard the term depreciation before: it refers to how much value your car loses over time. Said another way, depreciation is the difference between what you paid for your vehicle and what it’s worth as it ages. 

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?

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 a Manufacturer’s Suggested Retail Price (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 selling price
- $15,000 residual value
     $8,000 depreciation amount

Then, we divide the depreciation by the number of months in the lease term:

$8,000 / 36 months = $222.22 per month (plus taxes and fees, your rent charge, 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 your lease term. Using your negotiated selling price of $23,000 from the first example, your calculation would now look like this:

  $23,000 selling price
- $11,250 residual value
   $11,750 depreciation amount

Once again, we divide the depreciation by the number of months in the lease term:

$11,750 / 36 months = $326.39 per month (plus taxes and fees, your rent charge, 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! 

 

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 CarFax. However, some auto brands do better than others when it comes to depreciation rates – and choosing a vehicle brand known for retaining value is important whether you’re leasing, financing or purchasing a new car outright. 

The good news is that Toyota is considered to be a brand that holds value very well; in fact, Kelley Blue Book named Toyota as their 2021 Best Resale Value Brand. In another study, iSeeCars.com looked at more than 7.7 million new and used car sales (model years 2014-2019), and reported that the data showed “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 – because as we reviewed above, the better a vehicle holds its value, the less you’ll pay to lease it.  

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 resale values – congratulations on your decision!