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

BuyaCar team
Apr 23, 2021

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. It's this residual value that is just as important as the purchase price, especially if you're looking into a PCP finance deal, or buying a car with intentions to sell it on at a later date.

Almost all cars lose value over time, this is known as depreciation and it's a certain fact of car ownership that the car you bought for £10,000 a year ago is now worth less. But not all cars lose their value at the same rate, a car with stronger residual values will depreciate slower than one with weak residual values. There are several possible reasons for this, and much of it comes down to the perceived desirability of the car as well as variables such as availability and the time of year.

So why is it important to understand a car's residual value? Well you don't need to know, but if you want to get the most out of your money it's worth spending the time to do a little research.

Traditionally, strong residual values mean you lose less money on your car when you come to sell - with the car being worth a higher proportion of the amount you paid when you bought it. On the other hand, a car with a poor residual value will be worth a much smaller percentage of your initial purchase price, meaning you'll be losing money overall with a car that depreciates at a faster rate.

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 losses from the car's value at the beginning of the contract to its predicted value at the end. A car with weaker residual values will depreciate more over the length of your contract, so you'll have to pay off a much greater amount of money - which equals bigger monthly payments.

However if you're intending to keep the car at the end of the finance period, it might be worth paying off those bigger monthly sums. This is because a car that has lost more value while you were completing your monthly payments will be left with a much smaller final payment at the end, so there is a light at the end of the tunnel in that sense.

This does muddy the waters a little when it comes to calculating monthly PCP finance payments. Just because a car has a higher cash price doesn't necessarily mean it will have higher monthly payments. The car might have better residual values which means monthly payments could be lower than a cheaper car with worse residuals. This is an important consideration if you're intending to hand the car back at the end of your finance period.

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, 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.

Cheaper used car finance

The big news from all this is that used car finance is by far the best value avenue to take if you're trying to save some cash. The biggest drop in value during a car's lifespan is the initial drop when it goes from being a new car to a used car. What is initially a very dramatic drop in value gradually levels out as the car gets older.

This means that monthly payments for a PCP finance deal on a used car are likely to be even more affordable, because the amount of value falling off the car is much less, so you'll be paying off a lower sum as a result.

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 with rock-bottom monthly payments.

 

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