A car loan with residual value means that you do not repay the entire loan during the loan period, instead you have the corresponding car value in debt when the repayment period ends. Owning and having access to a car gives freedom in everyday life and for many it is a must to transport themselves daily. It is also one of our most expensive purchases, which is why we at Astro Finance want to help you by explaining how residual value affects your car financing.
Value reduction of cars
When buying and owning a car, it is important to take the depreciation into account. The depreciation is simply how much the car loses in value over time. A car is mechanically worn when it is driven. The engine and powertrain are worn the longer the distance you drive, just as the weather and wind wear on the car. The car also becomes technically outdated, which reduces its value. Therefore, to assess the cost of the car, it is a good idea to calculate interest on car loans in connection with the purchase.
How fast does the car lose value?
A car loses most value when it is brand new. Then the depreciation decreases gradually. An old car that has gone a long way loses hardly any value at all anymore from regular driving. Then the value is determined more by whether it has been serviced and repaired properly and if it has gone through the inspection.
There is no exact way to calculate this in advance. In addition to what has been mentioned before, it does matter what car model it is about, as well as wear, equipment level, color and more. Wear, dents and so on obviously pull down the value. A brand new car can often lose as much as 20-35% of its value in the first three years, sometimes even more. Therefore, buying a better used car may be more economical.
What does residual value mean?
Residual value is a term that is often used in connection with car loans. This means that the loan is arranged so that it is not repaid entirely during the term. The repayment plan is set up for a number of years, for example 3 years. An estimate is made in advance of what value the car will have when the repayment period ends. The loan is then arranged so that the remaining amount of the loan corresponds to the car's future estimated value.
In practice, you can then sell the car and become debt free, if the valuation matches the residual value that has been determined. It can seem tempting to have a high residual value. This means a lower monthly cost over time. But it is wise not to set the residual value too high as you can be forced to pay the difference yourself if the car itself is worth less when it is sold.
What loans do you get residual value on?
The arrangement with residual value is common for several different types of car financing, it applies to brand new cars but can also be used for used cars. Borrowing with residual value is also common in car leasing. Leasing means that a loan with residual value is paid monthly and often service costs and insurance premiums are also included in the monthly cost. It provides an easy-to-understand economy as the monthly cost is the same. Leasing can be compared to long-term rental of the car.
In the past, it has been most common for corporate customers to lease cars, but in recent years private leasing has increased in popularity. Leasing, however, means that it costs extra to cancel the lease early, so it is important to be absolutely sure which car you will need during the lease period. If you drive longer than agreed, extra kilometers can be expensive. Leasing thus makes you less flexible in the future.
How is the residual value calculated?
The residual value is thus an estimate of what the car will be worth at a predetermined time. Since so many factors affect the value reduction, it is difficult as a happy amateur to calculate the residual value. Normally, the residual value is calculated as a percentage of the car's purchase price. Mileage, what car model it is about, the car's color, equipment and so on are things that record when calculating a reasonable residual value. It is possible to find out what the corresponding cars have lost in value which is helpful when the residual value is to be set. However, keep in mind that the second-hand price differs between car dealers and private purchases and the market value may be affected by unforeseen events.
Guaranteed residual value
Since it is difficult to hit exactly right when setting a residual value in advance, lenders can sometimes offer a guaranteed residual value. It is simply a price that you promise to buy the car for when the loan period or the lease period ends. However, the guaranteed value does not apply regardless of how the car was worn and taken care of. However, a thorough inspection of the car is done upon repurchase or return of the car in accordance with the agreement signed.
Compare private loans with Astro Finance before you buy a car
With Astro Finance you can borrow up to $ 600,000 from any of over 30 different partner banks. Which bank suits you best is impossible to say in advance, everyone specializes in different types of customers.
If you as a private individual go to several different banks to compare the terms, they each take credit information on you. This affects your credit rating and can impair your ability to get a really low interest rate. If you choose to compare with Astro Finance, only one credit report is made. The service is completely free of charge and you do not commit to anything when you make a comparison. Instead, Astro Finance gets paid directly by the bank or lender when we help them get a new satisfied customer.