A Guide to Residual Value Leases

A residual value lease lets businesses finance equipment or vehicles by paying only for the asset’s expected depreciation during the lease term, often lowering monthly payments and preserving cash flow. 

This structure can be handy for businesses that want short-term access to assets without committing to full ownership. However, because the leasing company sets the projected end-of-term value, there can be risks if market conditions change. And for businesses seeking long-term control, custom equipment, or simple ownership, a business loan may offer greater flexibility and certainty.

In this guide, we’ll explain how residual value leases work, how they’re calculated, and when other finance options may be more suitable.

What is residual value on a lease and why it matters

The residual value of a finance lease is an estimate, typically set by the leasing company, of what the item (such as a car or piece of equipment) will be worth at the end of the lease term.

This value isn’t exact or scientific. It’s a projection based on factors like depreciation, market trends, and expected usage, expressed as a percentage of the original value.

This matters because residual value plays a key role in calculating your lease payments: the higher it is, the less of the item’s total cost you’re effectively paying off, which usually means lower monthly payments.

Conversely, a lower residual value means you're covering more of the item's cost, resulting in higher payments.

How residual value is calculated on a car or equipment lease

Residual value is calculated based on a few factors, including the length of the lease, estimated usage (like mileage limits), expected wear and tear, and general market conditions or depreciation trends.

For example, you lease a car worth £25,000 for three years. If the residual value is set at 50%, that means the leasing company expects the car to be worth £12,500 at the end of the lease.

That £12,500 is what you haven’t ‘used’ during the lease, and the rest (£12,500) is what you’re effectively paying to use.

How do I calculate the residual value on a car lease?

To calculate the residual value on a car lease, you multiply the original value of the asset – a car in this case – by the residual percentage offered by the leasing company. The standard formula for residual value is: 

Original cost × residual percentage = residual value

Who sets the residual value on a lease and is it negotiable?

In most cases, the leasing company (also known as the lessor) is responsible for setting the residual value on a lease. They base it on depreciation data, market trends, and resale values. For personal car leases, it’s generally non-negotiable. 

However, in some business-focused arrangements, especially in finance lease contracts or equipment leasing, there may be more room to discuss terms.

Sometimes, a residual value guarantee is included, which means you promise the asset will be worth at least a certain amount at the end of the lease. That’s something to consider carefully, as you may be liable if the market value drops.

Can I negotiate the residual value of a lease?

In most cases, no. For personal leases, the residual value is set by the leasing company and isn’t open to negotiation. In some business lease agreements, there may be a bit more flexibility, especially if the lease is part of a larger or custom arrangement.

However, even then, it’s usually based on standard depreciation models rather than direct bargaining.

How residual value affects your monthly lease payments

The relationship between your monthly lease payment and residual value is straightforward: a higher residual value usually means lower monthly payments. 

That’s because you’re only paying for the portion of the asset’s value that depreciates during the lease term. On the flip side, a lower residual value means higher monthly payments, but a smaller balloon payment (i.e. a lump sum) if you choose to buy the asset at the end.

If you're trying to keep your cash flow steady – something that’s especially important for small businesses – it’s good to understand this dynamic. Keeping monthly costs low might make the difference between staying within budget (or not).

What is a good residual value on a lease?

A strong benchmark for residual value is whether the asset’s value is 50% of original value or higher after three years. That suggests the asset holds its value well and will be cheaper to lease month by month.

However, if you want to buy the asset outright at the end of the lease, a lower residual value might be more appealing, since your final buyout cost would be smaller. There’s no one-size-fits-all answer – it depends on how long you plan to use the asset and what your end goal is.

End-of-lease options: buy, walk away, or refinance?

When your lease ends, you typically have a few options:

• Buy the asset by paying the residual value. If the item is worth more than the residual, that’s a win.
• Return the asset and walk away, with no further obligation (as long as it’s in good condition).
• Refinance or extend the lease, depending on what the leasing company offers.

What happens if the actual value is lower than the residual value?

If the actual value is lower than the residual value, this may affect your decision of whether to purchase or return the asset. If you agreed to a residual value of £12,500 but the car is only worth £10,000, and you want to buy it, you could be overpaying. In that case, returning it might be the better option (unless you can negotiate a lower purchase price).

Residual value in finance leases vs novated leases

The idea of residual value shows up in different leasing structures. In a finance lease, often used by small companies, the business leases the asset but is responsible for paying the residual amount at the end if they want to own it. This structure is popular because of the potential tax and cash flow benefits.

A novated lease, on the other hand, is usually arranged through an employer and forms part of a salary package. It’s often used for company cars, where the employee uses the vehicle but leasing costs are deducted from their salary.

The asset may still have a residual value, but the handling of tax, VAT, and end-of-lease obligations is different.

When to use a business loan instead of a residual value lease

While leasing is great for short-term use or when you want to avoid the hassle of ownership, it’s not always the best option. If you want full control over the asset, or you’re investing in something custom-built or long-term, a large or small business loan might be a better fit.

With a loan, there are no return conditions, mileage limits or end-of-term uncertainties. You own the asset outright from day one. That’s especially helpful if you're buying specialist machinery or want to invest in your growth on your own terms.

At iwoca, we offer fast, flexible loans that are designed with small businesses in mind. You can borrow exactly what you need, repay early with no fees, and get approved in hours, not weeks. It’s a smart alternative when leasing doesn’t quite fit your plans.

Get started today and apply for an iwoca Flexi-Loan – it only takes minutes and if you’re approved, you could get the funds within 24 hours. Apply now.