Dollars & Sense

Six Things to Know About Truck Financing

"People look into this business and quite often they think that it will be a simple thing to buy a truck. Many buyers don't know what they don't know or in other words, they don't know what questions to ask."

Heath Wood, Sales Manager of Middle Georgia Freightliner-Isuzu says that the new or first-time truck buyer has to do his homework before making the major investment in an expedited truck.   He says, "Before the buyer actually sits down with the finance person, there are things he has to know to smooth the purchasing process."

He continues, "For example, the buyer has to know whether he/she will be running team or solo to determine a realistic income picture.  This means that he must know which expedited carrier he will be signed with and some idea of what his potential revenue will be."

It's not like buying a car.
Jon Mosier, expedited truck specialist at Freightliner of Knoxville says, "It's not like buying a car.  While just about anyone can find financing on a new car, but  buying a commercial vehicle is a different story." 

"There are higher interest rates based on the buyer's credit, his driving experience, owner-operator experience and so on.  With a car loan, no money down is not unusual.  That happens very rarely in a truck buy unless the buyer is a fleet owner or an individual who has previously purchased a number of trucks through a lender.  Most financial institutions require two years of OTR experience.  First time buyers with no professional driving experience have very limited resources to use."

He continues, "If a buyer has established a relationship with his personal bank or personal credit union, those are very good financing options.  For one thing, they may grant the buyer with a small business loan with a lower interest rate or finance the purchase at a lower than prime rate."

"As with any large purchase, the buyer must have his credit record in order.  If he has any charge-off's, make sure those charge-off's are paid up.  Make sure the other bills are paid up.  That's just common sense.

First-time buyers need excellent credit and know their credit score.
Lending experts say that a record of on-time mortgage or car payments helps. So does a history of prompt credit card payments and minimal debt.  If a truck purchaser has had a recent bankruptcy or if he's delinquent on a credit card, car or even rent payments, that's a big obstacle to overcome.

"The finance companies will expect to see a three-year job history with names and phone numbers," says Heath Wood.  "They may want to contact previous employers for verification.  The buyer must know how much he can safely spend on a down payment.  It makes no sense to expend all his funds on a large down payment, then be unable to make the house payment."

He adds that with that solid credit history, the prospects are very good for the first-time buyer. "We have two "prime" lenders that we deal with, good conservative companies with whom we have great relationships.  Through the efforts of our very capable finance manager, we find that we can get around 85% of the prospective buyers approved for a loan."

Should the buyer pay cash? 
Even if the buyer is one of the ten percent of Americans who can afford to do so, money experts do not recommend that you pay cash for your equipment since the money can usually be put to better use someplace else. They believe that a minimum down payment is in the buyer's best interest as the government will help him to pay the loan by allowing him to deduct the interest on his individual income tax return, thus resulting in a tax savings. The buyer should have his financial advisor project the affordability of the equipment.
 
A buyer must have cash reserves.
"The buyer has to be aware that he's not going to leave the dealership with his new truck and immediately receive a pay check from his company.  Depending on the carrier the owner-operator is leased with, it could be as long as a month before he receives his first settlement. He has to have the cash reserves to support what he wants to do. A smart buyer should have at least a month's worth of expense money in the bank." 

It's not enough to simply come up with a down payment. A buyer should always have enough working capital on hand to handle emergencies.  Lending experts suggest that a buyer has three months of gross income on hand in the form of cash so that he can operate in the event of unexpected occurrences. 

To paraphrase the popular saying, "Stuff Happens!" Breakdowns occur, there are those slow weeks with little revenue, etc.  There is always something unexpected just waiting to happen to the self-employed.  The buyer doesn't want to be caught off guard.

Another suggestion for having enough working capital on hand would be for the truck buyer to establish a credit line with his bank so that if he does need extra cash, he can tap into that credit line.
   
A buyer should not put his home or retirement on the line to finance the purchase.  Heath Wood says, "One of the mistakes I see buyers make is to put their houses on the line to buy a truck.

Some buyers get a home equity loan or they borrow from their 401K or retirement plan to help them with the down payment for the truck.  Neither is recommended because, in effect, a home equity loan is usually a 15-30 year loan and the buyer could be paying interest for that length of time even though he disposes of the equipment in a much shorter time frame.

Jon Mosier says, "Using that type of financing is a huge financial commitment to make!  Buying a $100,000 truck is already a very large investment, but putting your house on the line is something a person should think long and hard about."

Talk to the lender
Traditional loans don't necessarily mean equal payments month after month. If a buyer's business is cyclical (like expedite), he should talk to his lender about setting up a schedule that gives him lower payments in slow months and higher payments when earnings are at a peak. Some new truck buyers also prefer higher payments early in the loan, when maintenance costs are lower, and lower payments as the truck ages.

Negotiation
Strictly speaking, the "art" of negotiation is not in the financing realm, but it is a part of the truck buying process and that's why it's included.  The dealers in the expediter truck market will make every effort to win the customers' business, but sometimes, they're limited on price flexibility.  

The wise buyer doesn't start until he has a firm price quote. Shaving a little off the purchase price is every buyer's wish, but he should not overlook other possibilities such as an extended warranty or preventive maintenance services at a reduced rate or no charge. It's important that any free or reduced charge extras be detailed in writing.

The final choice should not be made solely on the basis of price and incentives. The buyer should find out something about the dealer.
-Do they have a reputation for honesty and good customer service?
-What happens to their customers - especially their owner-operator customers -­ after the sale?