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Originally Posted by findtom
Well, the principle of a lease is that you're paying for what you use.
The residual is the predetermined value of the car that you are returning at the end.
The higher that value is, the less you are "using" while you have the car.... and consequently the less you are paying over the course of the lease.
So, say for example if the residual value is 60% and the MSRP of the car is $50,000. That means the residual value is $30,000. So in that case you are "using" $20,000 worth of the car during the course of the lease. So you're paying at least $20,000 plus interest, etc...
Now, if I get a 5% discount on the $50,000 that means I'm paying $47,500 for the car. If the residual stays based at the $30,000 I am now using $17,500 worth of the car instead of $20,000.
However, if the residual is recalculated based on the new sale price it goes down to $28,500 (60% of $47,500). Subtract the residual from the discounted price and I am now using $19,000 worth of the car. Still a savings, but not as much as if you keep the residual value of the car based on the MSRP so your discount comes right out of the part of the car you're paying for instead of being spread over the residual value and the amortized (used) portion of the car.
Hopefully that makes sense. When I bought my car they had the MSRP of the car at the top with the discount shown separately and the residual with the % in brackets which you can verify is based on the MSRP. Audi on the other hand just plugged in the discounted price in as the MSRP... so even though the % discount they're giving you sounds good it's actually equivalent to less if it's being calculated properly.
If you buy the car at the end of the lease it probably evens out... but IMO if you want to end up owning the car and don't have the cash to buy it you should finance, not lease.
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Great writeup, i really appreciate it.
I fully understand what your saying. I will definitely not be buying the car in 3 years. I never buy cars.
I lease my cars because A. i like to change cars quickly and B. all the other reasons you mentioned above...
Anyhow i will definitely look into it with my salesman on Monday...
But one thing i'm concerned about is if he tells me, No that's not how it works and we base our residual on the discounted price of the car...
What do i do then?