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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Residual value (lease)

What is residual value in a lease, and who carries the risk?

ONE OF 366 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Residual value is what a leased or financed asset is expected to be worth at the end of the term, and the figure the payments are built around: the higher the residual, the lower the instalments. Who carries it depends on the structure. In an operating lease the financier takes the asset back and bears any shortfall; in a finance lease, or a loan with a balloon, the business usually pays or guarantees the residual, so a vehicle or machine worth less than that sum at the end leaves a debt to refinance. Lenders read a residual set above realistic resale value as deferred repayment.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

A balloon is the debt left owing at the end of a loan; residual value is what the asset is expected to be worth then. Trouble starts when the first is larger than the second.

// WORKED IN

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