Definition
A residual value is the final sum due when a finance lease ends, agreed on the day the lease begins. It lowers the regular lease payments because part of the asset's cost is deferred. At the end, depending on the contract, you may pay the residual to keep the asset, refinance it, trade the asset in or return it. It works much like a balloon on a loan.
The residual is the part of a finance lease that stays unpaid until the end. It shapes both your regular payments and your options when the lease finishes.
How it affects payments
Push the residual up and the rentals fall, but the closing bill gets bigger. A lower residual means higher payments but less to deal with later.
End-of-term options
Depending on the contract, you may pay the residual and keep the asset, refinance the residual, trade the asset in so the dealer settles it, or return the asset. Plan which option you are likely to choose before the lease starts.
Compare with a balloon
Residuals on leases and balloons on loans work in a similar way. Our guide to balloon payments applies to both, and the equipment leasing review explains lease structures. For help structuring equipment finance, make one enquiry.
Common questions
Do I have to pay the residual?
It depends on the lease. Under many finance leases you choose whether to pay it and keep the asset, refinance it or arrange a trade-in.
How is the residual set?
It is agreed at the start, often within ranges linked to the lease term and asset type.
Sources and further reading