What are residual values?

Residual values show how much a car will be worth over time, influencing finance payments and how much cash buyers get back when they sell

James Wilson
Sep 29, 2019

A car’s residual value is the amount it’s worth after a given period of time, i.e. what proportion of its original purchase price it has retained when you come to sell or trade it in. You may not think it, but a car’s residuals, therefore, are every bit as important as its price.

That’s because a car that loses value quickly will cost you far more overall than one with the same cash price that retains its value better - whether you’re a cash customer or using car finance.

Traditionally, strong residual values meant you lost less money on your car when you came to sell - with the car being worth a higher proportion of the amount you paid. On the other hand, a car with a poor residual value could cost you hundreds if not thousands more - with a greater difference between the amount you paid to buy it and what you get back.

Residual values can have a similarly big impact on car finance monthly payments too - whether you’re looking at PCP finance or PCH leasing deals. That's because monthly payments for both of these options effectively cover the loss in value from the car's value new to its predicted value at the end of the contract.

 

This means that you can expect higher monthly payments for a car that loses value quickly, while cars that are worth more used could cost less. As a result, it's possible that a £30,000 car that retains its value very well - meaning it's worth a lot as a second-hand car - could cost less per month than another £20,000 car that's worth very little as a used car.

On the other hand, it’s still the cash price that is most important when it comes to Hire Purchase offers; a car with a higher cash price will always cost more per month than one with a lower price (provided the contract terms are the same). However, remember that if you're planning to sell the car on after a few years, you'll still benefit from choosing a car that retains its value well - as you'll get more for it when you do trade it in.

There are other subtleties to consider depending on whether you are buying new or used, which brands you are considering and what type of car you are looking at. If you're buying used, a car with low residuals will prove cheaper to begin with, as it's already lost much of its value - whether you're paying with cash or financing it.

Read our guide to how residual values can affect your car finance monthly payments to get your head around how to get a desirable car for a rock-bottom monthly payment.

 

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