How Does a Car Loan With Residual Value Work?
A car loan with residual value is a form of partial financing of your vehicle’s purchase price. Instead of borrowing 100% of the car’s value, you only finance a portion (for example, 60%) during the contract. The remaining part – most often around 40% of the purchase price – is defined as the residual value and is due in a single payment at the end of the term.
Concretely, if you buy a new car for €45,000 and finance it with residual value, you might borrow €27,000 (60%) to be repaid over 4 or 5 years. Your monthly payments will be based only on this financed portion. At the end of the contract, you will have to pay the residual value of €18,000 (40%) in one instalment. This formula is only suitable if you are realistically able to handle this final payment, either with your own funds or from the proceeds of selling the car.
It is therefore essential to align the chosen residual value with the expected resale value of your vehicle at the end of the contract. A car that maintains a good market value after 4 or 5 years is generally better suited for this type of financing than a model that depreciates quickly.