Let's say you lease a vehicle valued at $25,000. Over the course of the lease term (for this example, we'll use a common three-year lease term), let's say the vehicle depreciates in value to $12,500. This depreciated value is called the vehicle's residual value. When you lease this vehicle, you pay monthly payments on the residual value of $12,500 instead of $25,000.
Additionally, you're charged sales tax on the amount of the monthly payments only. Finally, you pay interest on the residual amount of $12,500 and interest and depreciation on the remaining $12,500.