In brief
Residual value is the amount a vehicle is expected to fetch at the end of the holding period. It is the largest single component of total costs and also the most uncertain.
How is residual value determined?
It depends on market demand, mileage, condition, equipment, and powertrain type at the time of disposal. It is estimated during procurement because it determines depreciation and therefore Total Cost of Ownership. In a lease, it is built into the payment: the higher the estimated residual value, the lower the monthly cost.
Who bears the residual-value risk?
That depends on the contract model. With mileage-based leasing, the lessor bears the risk, and excess or unused mileage is settled at the end. With residual-value leasing, the company bears it: if the actual sale proceeds fall below the agreed value, the difference is charged to the company.
With a purchase, the company bears the full risk but also receives the sale proceeds.
Why is residual value currently difficult to plan?
Because the used-car market is changing faster than the term of a lease. Changes in powertrains, subsidy policy, and regulatory requirements affect demand for certain vehicles, especially electric vehicles. A 48-month contract sets a value today based on assumptions about a market that does not yet exist in that form. Companies that do not want to bear this uncertainty choose contract models that leave the risk with the lessor and pay for that through the lease payments.
Further reading
Fleet Management Without Excel Spreadsheets
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