How Does a Car’s Residual Value Work and Why Is It Important?

 

What is a car's residual value? 

A car’s residual value is the projected market price of a vehicle at the end of a certain usage period—most often after 3, 4, or 5 years. Simply put, it’s an estimate of how much the car will be worth in the future when its lease or long-term rental agreement ends.

Although at first glance residual value may look like a simple number, determining it is a complex process influenced by the vehicle’s make, model, mileage, equipment, technical condition, and market dynamics. A correctly calculated residual value affects:

• the size of monthly lease and long-term rental payments
• the car’s value in the secondary (used) market
• the overall economic benefit of the vehicle in the long run

Why is residual value so important?

1. Residual value and monthly payments

Residual value has a direct impact on lease and long-term rental payments: the higher the projected value of the car at the end of the contract, the lower the monthly payment. In practice, the customer pays only for the vehicle’s depreciation, not its full initial price.

Simplified example:

Car price today — 25,000 €

Residual value after 3 years — 15,000 €

Depreciation — 10,000 €

→ The monthly payment is calculated based on 10,000 €, not 25,000 €.

That’s why cars that depreciate more slowly (e.g., Toyota, Lexus, Honda) typically have more favorable leasing and long-term rental terms. A higher residual value means lower monthly costs for the driver.

2. It determines a car’s attractiveness in the market

Cars with a high residual value are viewed much more positively in the market. They are most often perceived as:

• more reliable
• cheaper to maintain
• slower to depreciate
• in strong demand on the secondary market

For these reasons, even used-car buyers should evaluate not only today’s price, but also how a specific model has depreciated over recent years. Vehicles that hold their value more steadily can lead to significantly higher savings over time.

3. It helps evaluate long-term ownership costs (TCO)

TCO (total cost of ownership) is the true economic indicator of a car, including all operating and ownership costs. Residual value plays a particularly important role here: the higher it is, the lower the total cost of ownership.

High residual value = lower TCO.

This means that even if a car costs more today, if it retains value longer, it can be more economical than a cheaper model that depreciates quickly. In the long term, this often creates major financial differences.

4. It matters when planning when to change your car

One of the most practical insights supported by BRC experts’ experience: the biggest drop in a car’s value typically happens during the first 24–36 months.

This leads to two clear conclusions:

• for many drivers, changing a car every 3 years is an economically logical decision
• keeping a car longer can be beneficial, because depreciation usually stabilizes in later years

What determines a car’s residual value?

A car’s residual value is shaped by many factors that help more accurately predict future depreciation and long-term costs. The most important criteria are:

1. Make and model

Some manufacturers historically have better residual values. For example, Toyota, Lexus, and Mazda often retain value better than Peugeot or Renault because they are considered more reliable and cheaper to run.

2. Mileage

A simple rule applies: the higher the mileage, the lower the residual value. But it’s not just the number—it’s also its credibility:

• inconsistencies in service history
• sudden mileage jumps
• wear that does not match the declared mileage

Documented, consistent mileage is one of the key factors that increases trust in a vehicle.

3. Equipment and trim level

Well-equipped cars retain value significantly better than base versions. The biggest influence comes from:

• automatic transmissions
• driver assistance and safety systems (ADAS)
• advanced multimedia systems
• LED headlights and other modern solutions

Such models are more attractive in the used market, so their residual value remains higher.

4. Technical and aesthetic condition

Both buyers and experts look for consistency between the vehicle’s history, mileage, and real condition. Any mismatch (e.g., excessive wear, hidden damage, unclear repair history) reduces trust and directly leads to a lower residual value.

5. Fuel type and technology

Modern market trends significantly affect depreciation speed:

• diesel cars depreciate faster today than they did 10–15 years ago
• hybrids and efficient gasoline models retain value better
• EV residual value depends on battery condition, capacity, technology generation, and the manufacturer’s reputation

6. Market conditions

Residual value is not an isolated metric—it is influenced by broader economic and regulatory changes such as:

• inflation
• new-car price increases or decreases
• demand fluctuations in the secondary market
• legal changes (e.g., emissions restrictions, pollution taxes)

These factors can quickly change value trends for certain vehicle categories.

How is residual value calculated? (a simple model)

For simplified calculations, a basic formula is often used:

Formula

Residual value = Initial value × Residual value percentage

Annual depreciation typically ranges from 10–25%, depending on make, model, engine type, and market trends.

While this model helps explain the principle of depreciation, in reality the calculation is far more complex and based on broader data.

Simple calculation model (example)

If you buy a new car in 2026 for 30,000 € and the leasing company determines that after 5 years its residual value will be 40%:

Calculation: 30,000 € × 0.40 = 12,000 €

Meaning: Over 5 years you will pay 18,000 € (the difference between the initial price and the residual value) plus interest.

At the end of the contract, you can buy the car for 12,000 €, return it to the seller, or extend the lease.

BRC Autocenter position: how does BRC assess residual value?

BRC uses an advanced residual-value assessment methodology based on long-term data, which reflects real market conditions more accurately. Its key elements are:

1. 20+ years of historical data

Thousands of real vehicle sales allow accurate predictions of how the value of specific makes and models changes over time. This creates a reliable foundation for depreciation forecasts.

2. Market dynamics analysis in Lithuania and the Baltics

BRC continuously monitors and analyzes the market, including:

• changes in demand
• price dynamics of the most popular models
• average pricing trends
• growth of the EV segment

This enables rapid response to market changes and refinement of values in real time.

3. BRC vehicle valuation system

This is an integrated assessment model that includes these criteria:

• body condition
• technical condition
• mileage
• equipment and trim
• service history
• market segment
• market value projection

This way, the vehicle’s value is determined precisely and transparently.

Customers can download a detailed 250-point inspection report for every vehicle sold at BRC Autocenter free of charge.

1) Vehicle market segment (what kind of car is it?)

This is a classification that groups cars by size, price, purpose, or level of luxury.

Essence: it is the group the car belongs to based on its physical and market characteristics. The segment usually remains the same throughout the model’s production life.

Classification examples:

• A/B segment: small city cars (e.g., Toyota Aygo).
• C segment: compact cars (e.g., VW Golf).
• D segment: mid-size family cars (e.g., VW Passat).
• Premium segment: luxury cars (e.g., Mercedes-Benz S-Class).
• SUV segment: SUVs and crossovers.

The market segment directly affects value projection. For example, in the 2026 market, SUV-segment cars historically retain a higher residual value (projection) than luxury F-segment limousines, which depreciate much faster.

2) Market value projection (when and how much?)

This is a financial forecast indicating how much the car will cost in the future.

Essence: it is a number (most often a percentage of the initial price) that shows the vehicle’s depreciation.

Purpose: it helps calculate lease payments, insurance rates, or assess the return on investment.

Example: “It is projected that a new car purchased in 2026 will be worth 40% of its original price after 5 years.”

If you want to check a specific car’s segment or projected value in Lithuania, you can do so via Regitra databases or official reports from the European Automobile Manufacturers’ Association (ACEA).

4. Individual customer scenarios

BRC’s valuation system shows how different usage scenarios will affect a car’s residual value after 3, 4, or 5 years. It analyzes:

• mileage changes
• actual operating conditions
• chosen financing methods (lease, rental, buyout)

This enables customers to make economically sound and long-term decisions.

Car residual value: FAQ

1. What is a car’s residual value?
   A car’s residual value is the projected price of a vehicle after 3–5 years.
2. What does residual value depend on?
   Make, model, mileage, condition, trim level, technology, and market demand.
3. Why is residual value important?
   It determines monthly payments and the future value of the car.
4. How is residual value calculated?
   Formula: Initial value × (1 – annual depreciation)ⁿ.
5. Which cars retain value best?
   Toyota, Lexus, Mazda, Honda, Volvo, Subaru.
6. How does BRC determine residual value?
   A database, a 7-point model, and market analysis.
7. When should you consider residual value?
   When choosing a car for leasing, rental, and TCO calculations.

Looking for the ideal car? Contact our BRC Autocenter specialists—they will advise you and help you choose the most suitable model.