Residual Value: Meaning, Benefits, How to Calculate and Examples

All assets, heavy equipment and real estate or titled assets like cars, depreciate over time. Simply put, depreciation is a decrease of an asset's monetary value because of wear and tear or aging. Of all assets, cars are one of the most common depreciating assets. Every car has a specific lifespan in terms of utility, but it still depreciates in value as it ages and wears. However, even at the end of its useful lifespan, a car has some value, this is known as its residual value.

In the following sections, you will learn about residual value definitions, benefits, calculations, and examples.

Residual Value of a Vehicle

The residual value of a car is the approximate value of the vehicle after a period of time and mileage. It is the value that the owner receives at the time of disposal. Simply, it is an expected value of a vehicle when it is at its end of usefulness or after the expiry of a leased term. When buying a used vehicle, or buying any vehicle, the higher resale vehicles will allow you the highest residual value.

Factors That Impact a Car's Residual Value

The following is a list of issues that will affect a vehicle's residual valuation:

• Manufacturing Year: A vehicle's year of manufacture is a factor that will have a lot of influence on a vehicle's residual value. Newer vehicles will have a higher value than older models.
• Brand: The brand of a vehicle is another factor that will significantly affect the car's value. Vehicles manufactured by reputable car manufacturers have high residual valuations. Second-hand car buyers will often be looking for vehicles from reputed car brands.
• Condition: A vehicle's physical and mechanical condition will also impact its value. A vehicle will sell for a higher value at the end of its life if it has been maintained well.
• Distance Driven: The more distance a vehicle can drive the minimum its residual value will be, as the distance driven shows the level of wear on the vehicle.
• Features: Features that can affect the residual value of a vehicle include powered doors, automatic locks, anti-lock brakes, airbags etc. Parking sensors, infotainment system, alloy wheels etc. can also reflect residual value.
• Market Trend: Present market trends and advances in automotive technology will be a formidable influence for determining a vehicle's residual value. Some of the models of vehicles seem to become obsolete sooner than others and these will command a lower residual value.

Also Read: Things to Know About Buying A Used Car In India

How to Calculate Residual Value?

The formula for determining a car's residual valuation is:

Residual Value = Estimated Salvage Value - Asset Disposal Cost

First, determine the price of the car when it was new. Second, determine the timeframe you anticipate leasing or owning the car. Next, estimate its value at the end of its lifespan. This depends on many factors, including depreciation, technological advancements, mileage and market conditions. Include any costs anticipated for the sale or disposal of the car. This value should be deducted from the salvage value in order to compute the residual valuation.

Residual Value Example

Here is an example of a car’s residual value:

Suppose you purchased a brand new car worth Rs 12 Lakh, and its lease term is 3 years. You expect to cover 45,000 km with it and estimate its salvage value at Rs 6 Lakh, which is 50% of its original price. If its Asset Disposal Cost is Rs 50,000, its residual value will be Rs 6 Lakh – Rs 50,000 = Rs 5,50,000.

Also Read: Steps to Buying a Second-hand Car on EMI

Benefits of Residual Value

The following are some advantages of the residual value of a vehicle:

• Evaluates the overall depreciation of the car over its life cycle.
• Forecasts the car’s future value.
• Figures the monthly payment on the lease.
• Is useful in comparing two vehicles, thus knowing which car to lease.
• Holds more value and reduces depreciation, so you have smaller monthly payments.
• Smaller monthly EMIs make a Used Car Loan more attractive, especially if you want to change your car on a frequent basis.
• Helps you when deciding which car to buy, enabling you to maximise your money.

How Lenders Use Residual Value to Determine Used Car Loans?

This is how lenders apply residual value to calculate a Used Car Loan:

• Lending institutions use a car's residual value to determine its resale value.
• Since it's the vehicle that will be the collateral against the loan for the duration of the loan term, those with a higher residual value are preferred.
• The lender will readily approve loans for the purchase of used cars with a higher residual value.
• The lender is able to provide you with a higher loan amount at lower interest rates.
• Repayment terms are easier as the vehicle has higher value.

How to Apply for a Used Car Loan Online?

To apply for a Used Car Loan online, go to the Used Car Loan page of the Hero FinCorp website and click ‘Apply Now’. Fill in the details and submit. Based on your requirement and eligibility, you can get up to Rs 50 Lakh at competitive rates and flexible tenures of up to 5 years.

Before applying, check your eligibility criteria and calculate your EMI using the online loan calculator.

Also Read: What is Second Hand Car Zero Down Payment?

Conclusion

A vehicle's residual value will allow you to swiftly assess its value at the end of its useful life, and you can then use that knowledge to make a decision that maximises vehicle value. If you have researched the residual valuation of a vehicle and you want to buy it, you can apply for a Used Car Loan online.

A Used Car Loan allows you to purchase your dream car, while not paying its price upfront. Applying is easy for Used Car Loans and the rates are competitive. You can use a Used Car Loan Calculator to decide if you can afford your EMIs and to consider which loan tenure is best for you, before applying.

Frequently Asked Questions

1. What is meant by residual value?

Residual Value is the expected value of the asset at the end of the lease term or useful life of the asset. The owner may expect to receive this amount at the time of the disposal of the asset. It is clear that the value is important to the valuation of the asset, resale plan, evaluation of investments, leasing agreement, purchase decision, and the depreciation schedule.

2. What is a 30% residual value?

If the residual value is 30%, the car is worth 30% of the original price at the end of its life span or lease term and is the remaining value of the car after lease payments and depreciation.

3. How to calculate a residual value?

The formula to calculate residual value: Residual Value = Estimated salvage value - Asset disposal cost.

4. What is the residual value of a car meaning?

The residual value of a car is the total value of the car at the end of its life. This is like the resale value of a car which is the cost of the car less depreciation, or the loss of value over the period of time. A used car dealership would usually set the value of a car depending on condition, model, manufacturer, demand and model year.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.