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Why does residual value matter to me?

Why does residual value matter to me?


Why does everyone always keep talking about a car’s residual value? What is it and why is it so important? Motoring journalist, John Swift explains.

What is residual value?

Residual value (RV) is the difference between what you pay for your car and what the finance lender thinks it’ll be worth a few years down the line, when you come to sell it. So, why does that matter to you:

  • All new cars depreciate in value; what a car's worth after around 3 years, is what matters to you
  • Cars with better residual values generally have lower monthly finance payments
  • The depreciation of your car is the biggest single cost of car ownership
  • The more desirable the badge, the higher the residual value
  • Lower volume models tend to hold their value better

Find out how much your car's worth

Why does residual value matter?

If you’re buying a car on finance, then its residual value is one of the most significant parts of the package and could easily be the deal maker, or breaker, on you driving away in the car you want.

Residual value (RV) is the difference between what you pay for the car and what the finance lender thinks it’ll be worth a few years down the line, when you come to sell it. 

Most things you pay significant sums into, such as your mortgage or pension, should eventually create a valuable asset for you; unfortunately in the case of 99% of cars they only lose you money.

Even if you’re not using finance, but paying cash, the RV is usually still by far and away the biggest single cost element in your ownership, more than fuel, insurance or servicing.

graph showing depreciationBy João Pimentel Ferreira - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=28428767

On a typical finance arrangement you’ll make monthly payments based on the difference between what you pay on the day of purchase and what the vehicle’s expected to be worth on the day you sell it. Essentially you’re funding the drop in value of that asset and all other things being equal, sometimes it can be cheaper to go for an expensive car and this is why.

For example, if Car A coss £40,000 and is forecast to be valued at £20,000 three years down the road, and Car B costs £30,000 and is expected to be worth only £8,000 in three years time, then car A will have lost £20,000 but B £22,000. There’s actually a smaller value loss with the more expensive model and that should be reflected in your monthly payments.

It’s one reason why brands with a good badge appeal (Audi, BMW etc) have taken sales from more mass-market names such as Ford or Vauxhall.

If you can get a car for which there’s a waiting list, a limited edition model such as the new Alpine A110, where demand comfortably outstrips supply, you can easily make a profit; but, before you start reaching for the phone to buy one, remember that in many of these cases, buyers are often ‘vetted’ to make sure they won’t do this before the dealer will take their order!

Blue Alpine A110 driving round a mountain road bend

The key factors which make for good RVs are desirability, first, and relative scarcity second. A car widely accepted as being good can still have strong residuals even if it’s sold in big numbers, but an average car sold in significant volume is going to struggle to hold onto its value.

Some sectors will always be good at looking after your money. Sports cars and convertibles are pretty good because they’re fun cars and buyers will pay for that. The same goes for motorhomes or other leisure vehicles. SUVs have been very much the happening thing in motoring over the past several years and their second hand prices are strong.

Some are less good. Diesels have taken a hit, although buyers in the second hand market may not be so worried about the implications of government policies, but there’s no doubt that their RVs have been hit hard.

The stampede to SUVs over recent years has also left many hatchbacks, estate cars and MPVs struggling to find buyers, putting downward pressure on their residuals.

Ten cars with good RV performance

Audi A1:: Entry level supermini to the Audi brand has an image others can’t match.

Red Audi A1 parked two thirds on outside stately home

Explore the Audi A1 range

Ford KA plus: Smaller, five door and sub-£10,000 alternative to the Ford Fiesta.

Dacia Sandero Stepway: SUV styling from a brand that has made its name with excellent value.

Honda Civic: Surprisingly large and spacious family hatchback with some clever touches. Drives well and diesel version is stunning even if the government is trying to kill them off.

Red Honda Civic driving down a hot road

Explore the Honda Civic range

Porsche Macan: Porsche name and performance in an SUV. What else do you need to know?

Volkswagen California: Four berth camper van still leads the sector despite increasing competition. Great mix of leisure and everyday vehicle.

VW California with picnic table and beautiful view

Explore the VW California range

Toyota C-HR: Toyota has done very well with this head-turning SUV and it’s a top seller.

Peugeot 3008: Brilliant SUV given a head start over rivals with its cockpit design and multi-award winning PureTech engines.

Peugeot 3008 parked outside office

Explore the Peugeot 3008 range

Ford Focus RS: Latest hard core Focus delights its loyal fan base but is quite civilised too for everyday driving.

Suzuki Ignis: Pint-sized SUV but with Suzuki’s efficient engines and surprisingly good. Not a big volume seller but that helps RVs.