In financial leasing, non-full payout lease agreements (NFP agreements) and full payout lease agreements (FP agreements) are, in principle, both possible (see info box “Financial leasing: non-full payout and full payout lease agreements”). The two differ considerably. Full payout agreements for cars can have financial disadvantages for customers. If BaFin comes across these kinds of agreement, it checks that the customers were treated correctly. If any irregularities are identified, BaFin steps in.

FP agreements for cars generally do not make financial sense

While FP agreements for certain – quickly depreciating – lease items, such as software, printers and photocopiers, are quite common, it is much rarer for lessees to enter into these types of agreement for cars. This is because – as mentioned above – it generally does not make financial sense for the lessee to enter into an FP agreement without a purchase option for the car. The reason is that, after having amortised the lessor’s entire acquisition costs plus all additional costs through their lease payments, the lessee must return the car to the lessor at the end of the agreement.

For example: a customer enters into an FP agreement with the lessor (leasing company) for a new car, which has acquisition costs of €50,000. Over the four-year term of the lease agreement, the lessee pays a total of €58,000 in leasing instalments and special payments. When the agreement ends, the lessee has to return the car to the lessor. At that point in time, the car still has a value of €25,000.

As a result, to use the car for four years, the lessee has paid more than the original price of the car, but has to return it to the lessor. The lessor, on the other hand, has not only fully amortised the purchase price and all additional costs through the payments from the lessee, but also achieved a profit margin. On top of this, the lessor also receives the car back, now worth €25,000, with which they can make a further profit of approx. €25,000.

With a more customary NFP agreement for a car (for example, a residual value agreement or a mileage agreement), the lessee’s lease payments would only amortise part of the acquisition and of the additional costs incurred. The lessee's payments would only fully amortise the acquisition cost of the car if, at the end of the agreement, the lessee purchased the car by paying a purchase price.

In the example provided, an FP agreement without a purchase option has significant disadvantages for the lessee compared with a more customary NFP agreement. A credit-financed purchase of the car would also make more financial sense for the lessee than an FP agreement, due to the acquisition of ownership. An FP agreement of this type would only be as financially sensible as a customary NFP agreement or a credit-financed acquisition of ownership if the car has no real value at the end of the agreement. However, this is unlikely in the case of new cars and of the contract durations permitted under the Moveables Leasing Decree.

Why do lessees enter into such agreements?

Despite the clear financial disadvantages for lessees that these kinds of FP agreements have, it could be observed in the past that some leasing companies concluded predominantly FP agreements for cars with their customers.

The assumption is that many lessees entered into such FP agreements because they did not correctly understand the contents of the agreement or the lessor did not properly inform – or even deliberately deceived – them about its contents, for example through misleading advertising statements or oral explanations. It is also possible that lessees relied on verbal commitments or side agreements in good faith, which – contrary to the explicit wording of the agreement – were supposed to entitle them to purchase the car at a good rate.

It should be noted here that we know from experience that it is difficult for a lessee to prove verbal commitments or side agreements if the lessor later cannot or does not want to remember them.

BaFin’s powers – and its limitations

If BaFin becomes aware that a financial leasing institution under its supervision is not correctly explaining the contents of FP agreements to its lessees or is deliberately deceiving them about the contents, it can take supervisory measures to put a stop to such a business model. These supervisory measures can go as far as revoking the institution’s licence to provide financial leasing and ordering its resolution. But in the case of agreements that have already been entered into, only the civil courts are competent to decide on claims under civil law (surrender of the car, compensation for damages, etc.).

Customers, be aware!

Customers who are offered a full payout lease agreement for a car should very carefully review, or have someone else review, the written contents of that agreement and its financial consequences before signing it. They should also not rely on verbal commitments or side agreements, but rather ensure that any additions to the lease agreement are recorded in writing.