Residual Value (sometimes called salvage value) is the estimated value of a vehicle at the end of a lease.
VEMA sets the Residual Value for each individual vehicle based on expected market conditions for the vehicle type and the usage information you provide on your Vehicle Order form. Our goal is to set residual values as close as possible to re-sale numbers when the vehicle is auctioned at the end of the lease.
If the resale value at disposal (usually determined by auction) is greater than the residual value, VEMA will owe you the difference. If the value at the end of the lease is lower than the Residual Value, you will owe VEMA the difference.
VEMA sets the Residual Value for each vehicle. You’ll find a vehicle’s Residual Value in the Terms and Rates section of every VEMA lease agreement. We use the industry’s Black Book to assist us in setting residual values. Our goal is to set Residual Values that will be as close as possible to re-sale amounts at the end of the lease.
Sometimes a vehicle sells for more than the Residual Value. In this case VEMA would owe you the difference. The reverse would be true if the vehicle sold for less than the Residual Value.
The table below highlights how Residual Values affect the close of a lease.
|Residual value||Auction sale price||Difference|
|$10,000||$12,000||VEMA owes you $2,000.|
|$10,000||$8,000||You owe VEMA $2,000|
|$10,000||$10,000||$0. This is our goal when we establish residual values.|
It is possible to negotiate a higher or lower Residual Value — but only before a lease is signed. A higher Residual Value will lower your monthly rates. However, if the vehicle brings less money than the estimated Residual Value at auction, your organization will owe VEMA the difference. Again, the reverse is also true.
Frequently Asked Questions re. Residual Value
Q. The lease for our 2008 Dodge Ram Caravan expired this past spring. After the vehicle was auctioned and the lease was settled, we owed VEMA $800. Why?
A. Your vehicle’s Residual Value was higher than the amount the vehicle was able to bring at auction. This can happen for a variety of reasons including a decrease in demand for that type of vehicle; or the usage of the vehicle may have changed mid way through its lease resulting in greater wear and tear than anticipated. (See the last question and answer for more on maximizing utilization.)
The reverse of your situation is also possible. If the vehicle had sold for amount greater than residual, VEMA would owe the difference to you. If it sold for an amount equal to Residual Value, then neither you nor VEMA would owe the other any money.
Q. How does VEMA determine Residual Values?
A. VEMA looks at three main components:
- The vehicle’s “job.” What work will the vehicle be doing?
- Conditions and environment. Will the vehicle operate only in the city or strictly on highways?
- Driver details. Will the vehicle be assigned to one driver or act as a pool to many drivers?
Usage information allows us to more closely estimate Residual Values.
Q. Can I change a vehicle’s Residual Value?
A. Yes. You can change VEMA’s estimated Residual Value at the time you sign the Agreement Authorization document. Remember that even though a higher Residual Value will lower your monthly fixed rate, a higher Residual Value will also mean we need to get a higher resale price for the vehicle in order to “break even” at the end of the lease.
Q. Why is the ordering process so important so important to the end of the lease?
A. The decisions you make when you order a vehicle will impact the settlement at the end of the lease. The intended use of the vehicle and conditions the vehicle will be operating under determines the lease term and Residual Value. Any significant changes to the vehicle’s use or conditions during the course of the lease will impact on the lease settlement.
Let’s say that you leased a compact sedan in 2006 for a four year term. At the time you signed the lease you assumed approximately 25,000 km per year with mostly city driving. You assigned the vehicle to one driver. Based on this information, VEMA set the Residual Value at $8,000.
During the life of the vehicle, the actual use changed. The vehicle was used as a pool to haul equipment. Four years later at the end of the lease, there were almost 160,000 kilometres on the vehicle — significantly more than you had anticipated.
In a sense, by putting on an additional 60,000 km, you’ve used up more of the vehicle “life” than you expected. In this case, the original Residual Value no longer reflects the actual usage. We will get less for a vehicle with 160,000 km at auction than a vehicle of the same year with only 100,000 km. If we do get less than the Residual Value at auction, you pay VEMA the difference.
A Residual Value is really just a projection based on intended usage. To prevent end of lease “surprises,” monitor your vehicles’ usage regularly for signs of excess use as well as under-utilization. Rotate vehicles through your fleet to make the most efficient use of your vehicles — and lease agreements.