Residual value is an auto industry term for what most of us call a vehicle’s resale value. It’s a calculation of what a car is worth at a given time after it’s purchased new, and is usually expressed as a percentage of the original MSRP.
Those numbers are a big deal because car companies use them to set lease payments on new cars. The cost of leasing a vehicle is the difference between its new MSRP and its value at the end of the lease term. A higher residual value means lower lease payments.
Automotive Lease Guide, or ALG, is one of the organizations that calculates residual values. ALG uses its data to determine the winners of its annual Canadian Residual Value Awards, which recognize the vehicles and car brands that best hold their value.
ALG bases its awards on the residual values of three-year-old cars, trucks and crossovers in Canada. This year’s overall winners are Subaru in the mainstream category and Land Rover for premium vehicles.
ALG says its awards “recognize the collective health of a brand and how it manages new-vehicle transaction prices and incentives against used-vehicle values.”
In the premium category, the Land Rover Range Rover Sport is this year’s best mid-size five-seat SUV, and the Land Rover Discovery is the best mid-size seven-seat SUV. Finally, the Land Rover Range Rover is 2019’s best full-size SUV.
How are residual values calculated?
Residual value calculations take a number of factors into account. One consideration is how well a particular vehicle sells. The rules of supply and demand suggest that the more examples of a car there are in the used market, the lower that model’s residual value will be.
But that’s not all there is to it. Organizations like ALG also take into account the incentives a manufacturer offers on its new vehicles. If a new vehicle is deeply discounted or comes with cheap financing rates, it draws buyers away from the used-car market. That drives down demand for used examples of the vehicle, and its residual values fall.
Strong residual values are usually not an accident
Toyota makes a conscious decision to rarely offer big discounts or financing deals on its new vehicles. That works with the company’s reputation for quality to keep Toyota residual values high.
In this year’s ALG awards, the Toyota Tundra pickup was named best full-size truck for the 10th year in a row. The Tacoma mid-size pickup truck won its category for the ninth consecutive year, and the Toyota Sequoia full-size SUV is best in its class for the seventh year running.
Toyota’s reluctance to offer incentives means that, in general, you’ll pay more for one of its vehicles, new or used. But it also means that vehicle will retain a significant percentage of its value in the future.
Full-size pickup trucks from domestic brands are extremely popular in Canada. But Chevrolet, Ford, GMC and Ram almost never win retained value awards for their big trucks because they frequently use incentives to boost sales.
How do competition and technology affect residual values?
Vehicles with few direct competitors, like the Jeep Wrangler, tend to have strong residual values. The Wrangler won this year’s ALG residual value award in the off-road utility category. In fact, the Wrangler regularly appears in lists of vehicles with strong residual values because there are not many mainstream vehicles purpose-built for off-roading.
Industry-wide, electric vehicles have some of the lowest residual values. The majority of consumers are hesitant to buy EVs because of their limited driving range and a lack of public charging stations. That trend will change slowly as electric vehicle technology improves. For example, the Chevrolet Bolt and Hyundai Kona Electric both promise about 400 km of driving range at accessible prices, which will create more demand for this type of vehicle.
ALG 2019 Canadian Residual Value Award winners
- Microcar: Nissan Micra
- Electric car: Chevrolet Bolt
- Subcompact: Honda Fit
- Compact: Subaru Impreza
- Mid-size: Honda Accord
- Full-size: Toyota Avalon
- Sports car: Subaru WRX
Mainstream Utility Vehicles
- Subcompact utility: Subaru Crosstrek
- Compact utility: Honda CR-V
- Mid-size two-row utility: Subaru Outback
- Mid-size three-row utility: Honda Pilot
- Full-size utility: Toyota Sequoia
- Off-road utility: Jeep Wrangler
- Compact: Mercedes-Benz CLA-Class
- Mid-size: Infiniti Q50
- Full-size: Genesis G80
- Executive: Mercedes-Benz S-Class
- Sports car: Jaguar F-Type
Premium Utility Vehicle
- Compact utility: Volvo XC60
- Mid-size two-row utility: Land Rover Range Rover Sport
- Mid-size three-row utility: Land Rover Discovery
- Full-size utility: Land Rover Range Rover