Even dealerships. Yep. If you have a leased car, and it is in excellent condition, with proper care, still under warranty and with a lower mileage than expected, you have a piece of jewelry in your hands. And the lower, the better, of course. Why? Everything relates to the residual value of the vehicle, and it all means you have an excellent opportunity between your hands.
The Residual Value is the Key
When you have a leased vehicle and let's say, you want to keep it, the manufacturer initially estimated a residual value at the moment of signing. This was calculated based on multiple variables, but the main one was the amount of km the car would have when returned. Let's see an example from the all-new 2018 VW Tiguan. For doing it, I'm just jumping to Volkswagen Canada Build & Price Estimator and will be building a Highline with the 2.0 TSI 8 speed automatic 4MOTION:
You can build your numbers anytime. Please remember that all these offers are subject to some conditions, including credit approval by the manufacturer financing entity.
So, let's go directly to the numbers (residual value estimates):
2018 VW Tiguan Highline (39,175CAD MSRP) Residual Value Estimates:
|Estimated Residual Value After|
|Yearly Km||Brand New||1 Year||2 years||3 years||4 years||5 years|
These numbers were collected on June 11th, 2018. Please note these numbers vary as are estimated values the manufacturer makes on top of the vehicle resale value, sales history, reliability and multiple other factors. Use as a reference.
Based on these, we can come up with the following graphics:
The previous graphic contains all the data from the table "2018 VW Tiguan Highline (39,175CAD MSRP) Residual Value Estimates". Vertical values (Y-axis), estimated of the percentage of the original MSRP retained and horizontal values (X-axis) or lease contract term of the vehicle.
Now, essential things to note:
- Vehicle value drops more than 30% of MSRP after the first year & 12,000 km: Please note I will always specify how many km. A brand new vehicle kept in a garage for a year will retain more value than a rolled one for 12,000km.
- From the 1st to 2nd Year, the vehicle depreciates about 5% of MSRP no matter what mileage plan: This is the most steady/retained value period of the lease. Remeber that during this time, original wearable components are estimated to still be usable for other 1-2 years.
- After the 2nd year, the vehicle depreciates at about 7% of MSRP per year: While I surprisingly expected even a more step drop from the 4th to the 5th (due to warranty coverage termination, on the 4th), the rate comes to a steady 7% per year all the way down to the 5th.
Yes, it is an Estimate, but it goes to the Contract
And sure it does. If you sign this vehicle right now, the respective % of the MSRP will go into your contract and the financing entity (VW Credit Canada on this case), will guarantee you that, at the end of your lease you will be able to purchase the vehicle at that price. Not a cent more or less.
From the very moment you lease the vehicle, the Residual Value is fixed and defined, but not as a percentage. It will go straight as the number it represents. If the MSRP is 39,175CAD and the residual is 38%, then you will be able to buy the vehicle at the end of the lease for 14,886.5 (39,175 x 38%)
Now, How About the Low Mileage?!
OK, we've seen the numbers, seen the estimation idea and understood that even if it is an estimate, you get the guarantee on your contract. Now, how about my car? Let's see the following example and see how it falls into the graph:
Imagine you leased the Tiguan previously mentioned, but in this case, for only three years and 25,000km/year. The original Residual Value (according to our table) would be 52% of the MSRP:
- Original MSRP: 39,175CAD
- Residual at the end: (39,175CAD x 52%) = 20,371CAD
Let's continue with the sample "low mileage" story:
Now, let's assume that, because of work reasons(because your daily commute was better on a bus), you didn't drive it for the original amount of estimated km. In fact, you drove it less than half making it 12,000. What would this mean?
Basically, that there is a value gap on your vehicle in your favor. If we go back again to the graph:
Your vehicle value would have jumped from the 52% green line all the way up to the 56% blue one, meaning that your vehicle value is 4% more than the value originally estimated. And on a 39,175CAD MSRP, a 4% value would represent 1,567CAD.
What Options do You have with a Vehicle with that Gap?
There are multiple, so I will sort these out in the order of my personal preference, but just use these as ideas for your actual outcome:
- Call your Dealership and return it earlier: A pretty nice options. You have no idea how valuable is a vehicle for a dealership under warranty, with low mileage and less than three years old. Plus, you can jump into a new one, if that is what you need.
- Buy it: If the original residual value were 20,371CAD (the original 52%), then you would be paying that for a vehicle that is worth 21,938CAD (Original Residual + gap = 20,371 + 1,567CAD). No one better than you to know how much more you expect to keep the car, how well cared it was and
- Re-Sell it: Many people (including other dealerships) will be interested in acquiring a vehicle with that kind of positive gap.
- You have a lease takeover incentive: For some people, even 25,000 km/year is not enough. So if you literally drove your vehicle for two years at only 12,000 km/year rate, it means you have 50,000 km in the last year. And yes, I have friends who have made 80k on the odometer in less than 12 months. Just go and post your lease for transfer.
And how about If I go Under the Lines?
Well, then I suggest you go and read my two other articles about it. The thing is that manufacturers guarantee that you cover any extra "consumption" you make on top of the mileage with the "0.10CAD per extra km" line on the contract: