So, you’ve decided you want to lease a car. Great!
Now you should be thinking about your budget, and when doing that it’s important to note the many things that affect the lease price.
It can be overwhelming trying to make sense of how seemingly unrelated things can affect lease price, which is why we’re writing an article on one of our most common questions; ‘Does purchase price affect lease price?’
Because we answer this question a lot, we’re going to talk you through what sort of things affect lease price, and whether the purchase price is one of them.
What Affects Lease Price?
First thing’s first, what actually affects lease price? The answer is lots of things. There are a variety of factors that affect lease price, such as;
- Type of lease
- Length of contract
- Credit rating
- Annual mileage
- Additional features you may want on your car
- Initial deposit amount
- Residual value of the car
- When you need the car for
It should be noted that this is not an exhaustive list. But, these factors can affect the price of your lease, sometimes dramatically, so it’s important to take these into consideration when thinking about your budget. For more information on what affects lease price and why you can read our article here.
Does Purchase Price Affect Lease Price?
To an extent, yes. But not always.
Obviously, if you’re going to lease a Ferrari then it will cost more than if you leased a Ford Fiesta. However, generally speaking the purchase price does not affect lease price.
What does affect lease price, however, is the residual value.
What is the Residual Value?
We’re so glad you asked. The residual value is how much the car can be sold for at the end of the lease. The residual value of the car is independent to each make and model.
How Does the Residual Value Affect Lease Price?
The finance house is the one buying the car and therefore has financial interest in it. At the end of the lease agreement the finance house will sell the car. Naturally, they won’t want to make a loss when it comes to reselling so if a car loses its value quickly, you’ll be making up the loss in your monthly payments.
If you lease a car that has a high residual value, however, the finance house will be able to sell it for more, and therefore you won’t have to cover as much.
What Affects Residual Value?
The only thing that can affect the residual value is how many miles you will be doing during your lease agreement.
If you are doing a lower mileage then the residual value is likely to be higher and therefore your monthly payments lower. This is because the lower the mileage, the less wear and tear the car is likely to suffer from. Therefore, it will be worth more at the end.
Naturally if you are doing a lot of miles, then your vehicle is more likely to suffer from wear and tear, and so the value of the car will decrease, meaning that you could end up paying more.
Which Cars Have Better Residual Value?
Generally, prestige cars such as Mercedes, Audi and BMW hold their value much better than say, a Ford Focus. This means that the lease price on these cars tends to be cheaper than you would expect.
Though many people think the more expensive the car, the more expensive the lease, this usually isn’t the case down to the residual value of the car.
However, the more expensive the car the more the insurance is likely to cost, so that’s something to take into consideration before you start choosing a colour for your new BMW.
Who Determines the Residual Value of a Car?
Dealerships and finance houses use something called a CAP Gold Book. This is a universal guide that gives the future value of all vehicles. It’s completely independent and is considered the benchmark for everyone. So don’t worry, the finance house won’t be able to alter the residual value to make you end up paying more.
So essentially, the purchase price has little impact on the lease price, unless you get a really expensive supercar. Then, naturally, the lease price will be higher. It’s how much value the car holds that affects the lease price more than the purchase price. The residual value is a huge factor when determining how much your lease car will cost you. Remember, the more expensive the car does not always mean the more expensive the lease contract.