To buy a car, we often use a variety of financing instruments. Some of the most popular are car rental or leasing contracts. Eimantas Čepas, Senior Associate at AVOCAD, comments on what you need to know about these contracts and what misunderstandings often arise when you want to buy a financed car early in the hope of saving money .
According to the lawyer, when concluding a car rental or leasing contract, the buyer of a car can usually choose between paying only monthly instalments during the contract period and not buying the car at the end of the contract, or paying the residual value of the car and taking personal ownership of the used car.
It is important to note here that this refers to rental or leasing contracts between a consumer and a trader. In a consumer contract, the trader undertakes to transfer the ownership of the goods or services to the consumer and the consumer undertakes to accept the goods or services and pay the price. A consumer is a natural person who enters into transactions for purposes other than his business, trade, craft or profession. The consumer is considered to be the weaker party to the transaction when concluding a contract with a trader, which is why the law provides for additional safeguards to protect the rights of the consumer.
The Consumer Credit Act is one of the tools designed to protect the interests of consumers who are considering taking on financial obligations. The Consumer Credit Act enshrines the consumer's right to discharge all or part of his obligations under a consumer credit agreement at any time. If he does so, he is entitled to a reduction in the total cost of the consumer credit, consisting of interest and costs for the remaining period of the consumer credit agreement, calculated from the date of repayment of the consumer credit or part thereof.
Thus, if a contract is concluded and the owner decides to take ownership of the financed car before the final contractual maturity date, it is common practice to expect to save on the interest part of the lease or hire purchase agreement. However, there are occasions when, after expressing such a wish, the car financier asks to pay not only the residual value of the car, but also the interest for the entire pre-agreed period of the contract.
“The basis for such situations was provided by the provisions of the Consumer Credit Act, under which this Act applies to consumer credit agreements, but does not apply to lease or hire-purchase agreements when these agreements or a separate agreement do not stipulate an obligation to purchase the subject matter of the agreement, in this case a car,” notes E. Čepas.
Financing agreements are usually drawn up in advance by the lender. The condition that at the end of the contract it will not be necessary to buy the car for the remaining value and that it will be up to the buyer's wish to do so, may seem attractive to many consumers. However, a financier who takes advantage of this, by formally stipulating in a standard rental or leasing contract that the consumer is not obliged to acquire the car, or only acquires the right to acquire the car by expressing his/her will in a separate notice, may seek to avoid the application of the provisions of the Consumer Credit Act, which enable the consumer to save money by early repayment of the contract, without having to pay a portion of the interest. Such a provision is undoubtedly advantageous for the creditor, as it ensures that the consumer, even if he decides to repay the credit early, will have to pay the full amount of the pre-agreed interest for the entire term of the contract.
The Supreme Court of Lithuania, which has established uniform case law in Lithuania, has pointed out that when assessing whether the financier in such contracts, by not imposing an obligation on the buyer to purchase a car, does not intend to evade the application of the Consumer Credit Law and to make a potentially unjustified profit from the consumer, the purpose for which the buyer enters into the contract should be taken into account. In this case, the consumer's purpose is usually clear, namely to purchase a car by spreading the payments over a period of time.
In the Court's view, where the contract in question does not contain a clause requiring the consumer to acquire ownership of the car and these circumstances have not been individually discussed with the consumer, or where other circumstances suggest that the terms of the lease or hire-purchase agreement were intended to avoid the application of the Consumer Credit Act, the provisions of the Consumer Credit Act must apply to such contracts and the consumer's rights to discharge all or part of his obligations under the consumer credit agreement and to reduce the total cost of the consumer credit at any time must be protected.
Nor should the consumer's right to discharge all or part of his obligations under a consumer credit agreement at any time be confused with a modification of the credit agreement. This means that the consumer may decide on his own to prematurely discharge all his credit obligations, in which case he may not be required to renegotiate the terms of the financing provided.
According to Eimantas Čepas, attorney at law at AVOCAD, notwithstanding the possible unfair behaviour of creditors in not stipulating the obligation to purchase a car in rental or lease agreements, in order to formally avoid the application of the Consumer Credit provisions, a consumer who decides to redeem the car subject to the agreement before the due date is entitled to a reduction of the total price of the consumer credit, i.e. to the conversion of the interest rate at the time of the redemption of the car, thus lowering the overall price of the interest payable.