Residual value car insurance: notional value depreciation

As investments go, cars are one of the most useful but sadly least reliable assets, decreasing in value immediately and continually. There is very little that can be done to counter this fact, but one popular alternative, particularly for companies offering fleet vehicles, has been to lease instead of buy. When hiring a car you will agree its initial value with the lessor (party leasing a vehicle), called the “notional value” (conversely, the “residual value” of an item is the amount remaining following depreciation). Whilst you could argue that leasing and buying are much the same in terms of cost, financial experts may advise you that the residual value of a car is best invested into more rewarding outlets, such as mutual funds and savings accounts, given a car’s poor return as an investment. Sometimes a vehicle’s residual value will be higher than expected, in which case buying a car at the end of a leasing term could prove good business for the individual or company leasing. However, if the residual value of a vehicle drops at the end of a leasing term, the party hiring the car will undoubtedly choose not to purchase the vehicle and the leasing company stands to suffer a loss. It is due to this latter instance that car leasing companies have sought to cover themselves for losses with residual value insurance (RVI). Individuals similarly employ RVI to cover any prospective difference between projected residual value and actual residual value.

Residual value insurance (RVI)

A lessor will naturally take into account the possibility of a vehicle losing value at a greater rate than expected. Judging the residual value of a vehicle is a very difficult task, hence car leasing companies seeking to tie in some form of insurance to the business to begin with. Naturally, an additional benefit to linking the business to an insurance company is the added credibility it gives in the eyes of the lessee (party hiring the vehicle). The fact that car leasing companies seek this assurance is actually beneficial to the lessee also (albeit as a by-product), as risk undertaken by the lessor is reduced and therefore financially unviable deals can become much more feasible prospects for both parties. In such an instance, the lessee will almost certainly find that terms are more flexible, with payment costs lower also.

Also known as asset or equipment value insurance, RVI guarantees the minimum residual value of a vehicle, as policies will pay out in the event of the vehicle falling in value below the agreed amount (on a specified date in the future). In other words, for individuals wishing to protect themselves against an unexpected low residual value, RVI restricts the level of their vehicle’s devaluation. Another benefit of RVI is that it may take into consideration unexpected influences, such as the stock market and oil prices. It’s a good idea to check the factors that would affect your policy and the level of insurance with your insurance provider.

Benefits of car hire over car purchase

Many would argue that the benefits of hiring a vehicle far outweigh the drawbacks, with the avoidance of personal bank loans, the opportunity for cars to be renewed at much less cost than ownership (and sale) would allow and the option to buy out the leasing company at the end of the term. Leasing isn’t without danger, however, and breaking a contract would be subject to strict fees and could mark your financial record. Some lessors may also set a limit on the mileage you are allowed to put on the vehicle, which will firmly remind you of the restrictions a lack of ownership brings. If you are interested in using a large car, one that consumes a higher proportion of fuel, you may find that increasing petrol prices seriously affect the car’s resale value. In this instance, hiring a vehicle may prove much more cost effective

Residual value car insurance applies most expressly to vehicle lenders, protecting their asset against a loss in value over time. With residual value being so difficult to quantify, it is no wonder that most lessors require it as a means to minimise risk. With such additional benefits for the lessor in terms of controlling costs and gaining credibility, and improved value for the lessee of course, RVI is universally a useful asset. For the individual, residual value insurance can bridge the gap between estimated value of a vehicle at the start of a lease and actual value at the end of the term, particularly with regards to the buying option. Residual value insurance has the potential to minimise your out of pocket expenses at the end of a lease, and cover you against fluctuations in oil prices, the currency market and similar factors. Given the niche nature of this insurance for the individual (but also considering its potential worth), it’s a good idea to speak to an experienced, qualified insurance broker to find out how RVI can safeguard your vehicle investment.