Leasing and hire purchase: full versus partial amortisation, cost comparison with a loan and the balance-sheet effect

What you will learn

• Operating lease, finance lease with Vollamortisation or Teilamortisation, and Mietkauf (hire purchase).
• Who owns the asset for tax purposes: the 40 to 90 percent rule of the German leasing decrees.
• Comparing a lease with a loan by total cost and implied interest rate.
• The effect on the balance sheet, the equity ratio and VAT.

Explanation

The contract types

Leasing is paying for the use of an asset owned by the lessor (Leasinggeber). An operating lease is a short, cancellable rental. A finance lease (Finanzierungsleasing) has a non-cancellable basic term (Grundmietzeit), and you carry maintenance and risk. Two forms exist:

• Vollamortisation (full amortisation): the payments during the basic term cover the full price, interest and the lessor's costs. Payments are high; at the end you may have a purchase or extension option.
• Teilamortisation (partial amortisation): the payments cover only part of the price; a residual value (Restwert) remains, so payments are lower. Read the clauses: an Andienungsrecht lets the lessor force you to buy at the residual value, and you usually bear a shortfall if the asset sells for less.

Mietkauf (hire purchase) looks like a lease, but ownership passes to you automatically with the last instalment; for tax purposes you own the asset from day one.

Who owns the asset: the leasing decrees

German tax law attributes an asset to its economic owner. Under the long-standing Leasingerlasse (leasing decrees of the Federal Ministry of Finance), a finance lease stays with the lessor if the basic term is between 40 and 90 percent of the asset's normal useful life (betriebsgewöhnliche Nutzungsdauer from the official AfA tables) and any purchase option is not far below market value. Then the lessee books the payments as operating expenses (Betriebsausgaben) and nothing appears on the balance sheet. Outside that range, or with hire purchase, the lessee capitalises and depreciates the asset, and only the interest part is an expense. Small businesses report under the German Commercial Code (HGB), which follows this logic; the IFRS rule that capitalises almost all leases does not apply to them. Trade tax adds back part of lease payments above an allowance; ask your Steuerberater.

VAT

With a lease, VAT is charged on each instalment. Hire purchase is treated as a supply of goods: VAT on the whole purchase price is due at the start and must be financed until the refund, as in lesson 1.

How to compare a lease with a loan

First, total cost: add every lease payment, deposit and fee and, if you intend to keep the asset, the residual value; compare with the sum of loan payments. Second, the implied interest rate: treat the lease as a loan of the purchase price with the payments and residual value as repayments, and find the rate that makes them equal (a spreadsheet's IRR function). Total cost ignores timing; the implied rate is the fair comparison.

The balance-sheet effect

A loan-financed purchase raises assets and debt, so the equity ratio (equity ÷ total assets) falls, which weakens the rating from lesson 3. A lease attributed to the lessor leaves the balance sheet unchanged, although a careful bank still asks about the payment obligation. Leasing also preserves credit lines and needs no extra collateral.

Worked example

Hypothetical example: a courier needs a van costing €36,000 net. Fees, insurance, maintenance and taxes are excluded; the loan uses annual payments for simplicity.

Option A: loan

Four-year annuity at 5 percent: A = €36,000 × 0.05 ÷ (1 − 1.05^−4) = €10,152.43 per year. Total paid €40,609.70; interest €4,609.70.

Option B: partial-amortisation lease

48 monthly payments of €640, no deposit, residual value €9,000 (25 percent). Basic term 4 of 6 useful-life years = 67 percent, inside the 40 to 90 percent range, so the van stays with the lessor.

Payments: 48 × €640 = €30,720. If the courier buys the van at the end: €30,720 + €9,000 = €39,720, slightly below the loan total of €40,609.70. If the van is returned, cash out is €30,720, but there is no van.

Implied rate (IRR on −€36,000, 48 × +€640, +€9,000 at month 48): about 0.27 percent per month, or about 4.1 percent effective per year, cheaper than the 5 percent loan here, before any processing fee.

Balance-sheet effect

Before: assets €60,000, equity €24,000, equity ratio 40 percent. With the loan: assets €96,000, equity unchanged, ratio €24,000 ÷ €96,000 = 25 percent. With the lease: ratio stays at 40 percent, although €30,720 of future payments are committed.

Option C: hire purchase

Same 48 payments, but the van is on the balance sheet, the equity ratio falls as with the loan, and VAT of 19 % × €36,000 = €6,840 is due at the start instead of €121.60 per instalment.

Common mistake

Practice activity

On paper: a print shop needs a €20,000 machine with a useful life of 8 years. Option 1: five-year annuity loan at 4 percent, annual payments. Option 2: lease with 60 monthly payments of €330 and a €4,000 residual value the shop intends to pay. Balance sheet: total assets €80,000, equity €30,000. Calculate the loan annuity and total interest, the lease total cost, whether the lease term is inside the 40 to 90 percent range, and the equity ratio before and after a loan-financed purchase.

Key takeaways

• Full amortisation pays off the asset within the term; partial amortisation leaves a residual value whose clauses decide your risk.
• A basic term of 40 to 90 percent of the useful life keeps the asset with the lessor and off your balance sheet.
• Compare leases with loans by total cost and implied interest rate, never by monthly rate alone.
• Leasing protects the equity ratio and credit lines; loans and hire purchase put asset and debt on your books, and hire purchase brings VAT forward.

Next step

The next lesson turns to the shortest-term financing of all: supplier credit, the Skonto decision and factoring.