What is the residual value of a car?
The residual value of a car is an important consideration for those who choose to lease their vehicle. So what does “car residual value” mean?
29 May 2025
The residual value of a car is an important consideration for those who choose to lease their vehicle. So what does “car residual value” mean?
KEY POINTS
- A car’s residual value is how much it is worth at the end of a car lease.
- The minimum residual value of a lease car is determined by a formula set by the ATO.
- Residual value is used for calculating how much you’ll need to pay if you want to buy the car at the end of a car lease or novated lease.
What is the residual value of a car?
When you’re leasing a car, the residual value is what the car is worth at the end of the lease term. Vehicles typically depreciate (go down) in value as they get older. So, after a few years, a car’s value may have decreased significantly compared to what it was worth when it was first driven out of the dealership.
A car’s value typically depreciates fastest in the first few years, with the rate of depreciation slowing as the car gets older. Cars tend to lose their value over time for a variety of reasons, including:
- Wear and tear on the car and its engine
- The manufacturer releases a newer version of the car’s model, often causing the older model to become less desirable.
Residual value is sometimes also known as salvage value or scrap value.
A decision from the Australian Taxation Office (ATO) in 2002 sets out the minimum residual values for leased cars (based on an effective life of eight years). As a formula, according to the ATO’s ruling, this is shown as:
Minimum residual value as a percentage of cost = 75% − [ (75% / Effective life ) × Term of the Lease ]
Residual value of a lease car
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| Lease year | Minimum residual value |
|---|---|
| Year 1 | 65.63% |
| Year 2 | 56.25% |
| Year 3 | 46.88% |
| Year 4 | 37.5% |
| Year 5 | 28.13% |
Sourced 8 May 2025 from the ATO’s website
In other words, after a one-year lease, the residual value of the vehicle would be at least 65.63% of its original value, and so on. This can give you a benchmark to calculate your vehicle’s residual value based on its original ‘drive-away’ value.
For example, using the ATO example only, if you lease a $50,000 car for a 3-year term, its residual value would be $23,440 at the end of this term.
What could the residual value mean for a lease agreement?
You may be wondering what residual value means for a car lease, as well as for the lenders themselves?
Lenders know that the cars they lease to borrowers will devalue over time. For this reason, they will typically calculate regular lease payments based (at least partly) on the loss in value that’s expected to occur during the lease term. However, other costs and factors are also likely to be built into the regular lease amount that’s charged.
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How much do you pay when buying a car at the end of a lease term?
If you’re coming to the end of your lease, you may be interested in purchasing the vehicle. In this case, you may want to know its residual value, as this could affect your final payment.
If you have arranged to purchase the vehicle at the end of the lease term, the amount you would need to pay would typically be based on the vehicle’s residual value. The amount paid at the end of a lease term is often referred to as the ‘balloon payment’.
What is a novated lease residual value?
If you enter into a novated lease for a car (an arrangement between you, the car seller/lender, and your employer where the lease payments are deducted from your pre-tax salary, also known as a salary sacrifice), the car’s residual value may also be a significant factor in determining the regular lease payments.
If you decide to purchase the vehicle outright at the end of the lease term, its residual value will also be factored into your final payment. If you decide not to buy the car at the end of the lease term, you may be able to either trade it in and enter a new novated lease for a different car, or renew the lease based on the car’s residual value.
Cover image source: VesnaArt/Shutterstock.com
This article was reviewed by our Finance Editor Jessica Pridmore before it was updated, as part of our fact-checking process.
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