The residual value of anything, (including cars or vans) is the price of an asset at the end of its usable life. How much, for example, is a vehicle worth in 3, 4 or 5 years etc.
Independent vehicle pricing companies are the main driving force in the UK for all things relating to vehicle pricing, including the residual value’s, or RV for short.
In order for a leasing company to quote you a contract hire rate, they need to use the RV’s from these companies. This will help them understand the value of an asset at a particular period of time, which in turn will ultimately underwrite future business and show them the level of risk.
These companies are an unbiased force in the world of leasing. Providing a wide view of the market and trends, whilst also providing detailed market research on how they create those prices.
Data is both sent and collected by these companies on a daily, if not hourly basis via various mediums such as auctions and manufacturers. The data they receive is then used to understand how the current market is performing. Once all the data is collated and verified, they can then create an accurate “average” price in their guides which various companies will buy, including financial institutions or leasing companies.
This basic foundational level of data gathering is ultimately used to help forecast the future price.
The RV plays the most important role in any lease, as it is susceptible to trend and variation within the market. After all, this is simply a prediction for a future value, it does not guarantee it.
Here’s the important bit. Leasing companies can manipulate the RV to help manage the “risk” associated with an asset. This is all perfectly legal, much the same way in which someone can increase or decrease the value of their house depending on what is happening in the market. It is just being applied to assets of smaller value, with more volume.
As the RV is directly linked to the final contract hire rate, this means that large leasing companies can adjust that rate if it is deemed to be too expensive or cheap. Remember, they are trying to remain competitive with their rivals, manage their profit margin, but also not price themselves out of the market.
Believe it or not, you also have an influence on the RV. For example, if you choose a bright purple car then the RV will be brought down accordingly, as it’s now harder to sell. Likewise, if you apply lots of desirable options to the car, it is now easier to sell. The key is about how proportional the value of an option is from an RV perspective, but also how much it costs from the factory. A specific example might be something like a Band & Olufsen stereo, which from the factory might be a few thousand pounds, but in the real world a few years later would only be a few hundred. Proportionally speaking, you would pay more for your lease over the term, than it would be worth at the end. In effect, YOU pay for the price difference between a better or worse RV and the capital cost. An adjustment in the RV is completely at the leasing companies discretion, so please be aware of that.