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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat residual value is
Residual value is an estimate, made at the start of a lease, of what the asset will be worth when it comes back. Four factors usually drive it.
1
Asset type: equipment with an active resale market tends to hold its value better than custom-built machinery.
2
Tenure: the longer the lease, the more the asset wears and ages, and the lower its value at the end.
3
Use and care: hours of use, operating conditions and maintenance all affect its condition on return.
4
Technology: assets that date quickly, such as some IT and medical equipment, tend to lose value faster.
In an operating lease the lessor carries the risk that the asset is worth less at the end than assumed. Because it owns the asset, it also generally keeps any gain if it is worth more.
When residual value matters
Residual value matters most in operating leases, where the lessor relies on it to price rentals. A higher or lower assumption changes the deal.
WHAT CHANGES
Higher residual value
Lower residual value
Amount rentals must recover
Less of the asset's cost
More of the asset's cost
Monthly rental
Can be lower
Tends to be higher
Typical assets
Assets with a strong resale market
Specialised or fast-ageing assets
Lessor's risk
Larger
Smaller
How residual value affects rentals
Rentals have to recover the part of the asset's cost the lessor does not expect to get back at the end. On top of that, they carry the lessor's cost of funds, its own costs and its margin, spread over the tenure.
Cost less residual value.
Amount to recover = asset cost − residual value. A higher residual value shrinks this amount, so rentals for the same asset and tenure can be lower.
Who carries the risk.
If the asset is worth less than assumed when it comes back, the lessor takes the loss, provided the lessee returns it in the agreed condition.
Lessors set residual values from their own data, so the figures behind two quotes may differ.
Where it shows up
Two residual values, two rentals
ILLUSTRATIVE
A packaging company leases a ₹1.2 crore printing line for 60 months. If the lessor assumes a residual value of 25%, or ₹30 lakh, rentals must recover ₹90 lakh of the cost: ₹1.5 lakh a month, spread evenly and before funding cost and margin. At 10%, or ₹12 lakh, they must recover ₹1.08 crore: ₹1.8 lakh a month on the same basis. The higher assumption lowers that part of the rental by ₹30,000 a month, but leaves the lessor more exposed if the line is worth less than ₹30 lakh when it comes back.