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Residual Values

Things to know to avoid a financial rollover

Whether you're seeking a new automobile or a secondhand model, awareness of residual values is crucial for selecting the best prospects. Used mainly by the leasing industry, residual values are predictors of what a new car or truck will be worth, compared to its initial price, when it's two, three, or four years old. Resale value, in contrast, specifies what the vehicle actually will sell for, once it's reached the used car marketplace.

Numbers Game

Residual values may be expressed either as percentages of the original selling price, or in dollar amounts. When comparing vehicles, percentages work best. High residual value means the car holds its value well. That's good news for new-car buyers who expect to resell later, because it will probably command a good price at that time. High residual figures are less welcome for the used-car buyer who likes that particular model, because it's likely to be more expensive secondhand.

One model might earn a predicted residual value, as a three-year-old vehicle, of 60 percent or more. Another could have a predicted worth of only 35 percent of initial selling price, which means it's likely to depreciate rapidly. That one should be favorably priced for the eventual used-car customer, but the original owner will have taken quite a hit.

Automotive Lease Guide (ALG) is the best-known publisher of residual values; it's the company's sole business. Similar residual-value guidebooks are issued by Kelley Blue Book (KBB), which caters to consumers, and by Black Book, which makes its publications available primarily to dealers and financial institutions. Each guidebook provides residual-value projections for all popular models, after 24, 36, 48, and 60 months of life.

Shop Wise

New-car shoppers need to determine which vehicles of interest are likely to hold their value best. Anticipated resale value is only one factor to consider in making the buying decision, but it's an important one. Unless you plan to keep it for many years, why buy a car that will be worth little after three years? Used-car shoppers must make comparisons in the opposite way, searching for models that have depreciated rapidly. But beware of vehicles that decline fast for tangible reasons, such as reliability problems.

Forecasts vary by brand, model, and category. "Residuals, on the whole, have been relatively stable," said ALG president Raj Sundaram. "Clearly, the SUVs are under some pressure" from rising fuel prices, thus hastening their depreciation. Still, Sundaram notes that GM's new SUVs are "doing pretty well."

With certain exceptions, import brands tend to retain their values better. "Toyota is strengthening even more," Sundaram said, whereas "Volkswagen is softening a little bit." Sundaram believes that "Toyota and Lexus are going to be very close" to Number One. "Premier Japanese brands will continue to widen their advantage" in slow depreciation.

"Domestics are at least stabilizing now," Sundaram said, though "expectations are not very high" compared to Japanese brands. "Some of the Koreans are actually getting a little weaker, [and] Mitsubishi is definitely not doing as well" in residuals.

Trend Watch

"Trends really favor the imports," said Jack Nerad, editorial director at Kelley Blue Book. Consumer demand for import brands is strong. Such popular makes as "Honda and Toyota do particularly well," and the "Accord has been a mainstay." Hybrids have also "projected good resale value."

Citing the Buick Terraza as an example of a vehicle that does not hold its value, Nerad advises that "domestics aren't faring particularly well overall." The American automaker's "business model is a bit different," and making too many vehicles available to rental fleets "has a depressing effect."

Ricky Beggs, managing editor of the Black Book, notes the current residual-value leaders include Corvette, Viper, MINI, BMW's M3, Cadillac's XLR, and the Lexus GX 470 sport-utility. "None of these vehicles are high volume vehicles," Beggs explained. "You won't find any of these in fleets." Weak residuals have been noted by Black Book for the Ford Expedition and Buick Rendezvous, along with some Chevrolets, the Kia Rio and Optima, and Hyundai's Tucson.

"The cars that bring better money on the used-car market generally have better residual values" when they were new, Beggs said. "The economical car is still doing well," and the full-size SUV "has come back" after big declines late in 2005.

Top Brands

For 2006, ALG named Honda and BMW the top brands for holding their values. Segment awards went to the MINI Cooper, Honda Accord and Odyssey, Acura TL, Mercedes-Benz CLS-Class, Porsche 911, Range Rover Sport, and six Toyota models.

Kelley Blue Book presented its top Residual Value Awards to BMW and its MINI subsidiary. Additional awards went to the Honda Accord Hybrid and Odyssey; Infiniti M45 and G35 coupe; Corvette convertible; Toyota Prius and Tacoma; Porsche Cayenne; Subaru Outback wagon; BMW 5 Series; Lexus GX 470; and Volvo XC90.

"Depreciation is clearly the consumer's biggest vehicle cost over the typical ownership period," said KBB president/CEO Paul Johnson. Information on residual values can be obtained from Automotive Lease Guide at alg.com, and Kelley Blue Book at kbb.com.