Bucks for Trucks

No matter what you hear these days about lenders being tightfisted, sometimes the financiers are just too willing to bend the rules a little to keep the deal on the rails. The downside is, re-jigging the terms isn’t always in the buyer’s best interest. If you have to finance 95 per cent of the purchase, you’ll be hard pressed to ever pay it off. The truck will be worth less than you owe at the end of the term. If you’re serious about growing your business, you need to understand the importance of equity to a truck owner. Without it, you’re toast.

Simply put, equity is the value of ownership. There’s no value to what you don’t own, so ideally you want to be in nothing worse than a break-even position. If you owe more than you own, you’ve got negative equity, a common result when you finance a truck with little money down and a large residual balance to pay at the end of the term.

For example. let’s say you’ve put 5 per cent down on a $120,000 truck with a 20 per cent residual payment of $22,800. Now let’s look at two disaster scenarios to illustrate the difficulty of the equity trap. Both are quite possible, and utterly unpredictable on the day you sign for the loan:

1. You’re involved in a collision and the truck is destroyed. The insurance company decides to write it off. Insurance will pay only the “fair market value” of the truck, and the finance company will be paid first. If the value of the truck is less than you owe on it, you’re on the hook for the balance.

2. You decide to sell the truck halfway through the financing term. You discover the truck is worth less than you still owe on it. You can’t sell it at a loss unless you can repay the balance owing to the finance company.

It happens, and frequently these days. New-truck production set records in 1999 and 2000, and ultimately flooded the market with ones taken in on trade. Consequently, if you presently own a 1998-model truck, chances are the value of the truck on the retail market is quite a bit less than you’d expect. And with the low-money-down and high-residual buyout option, there’s little equity in that truck. You likely owe more on the truck than you could trade or sell it for. If that’s the case, you’re said to be “upside-down.”

The way to avoid falling into that trap is to know what you’re getting into, and to know where to draw the line.

To make the purchase of a truck easier for marginal buyers, some financing plans have removed the high up-front costs, the down payment, and moved that cost to the back end of the repayment schedule, calling it a residual buy-down. Rather than fork over 20 per cent at the beginning, you can get in with only 5 per cent down, requiring you to make a final payment at the end of the term of 15 or 20 per cent of the price of the truck.

The chart to the right shows how the two deals compare on paper. The monthly payments are close to the same, but in the first example, the buyer has $24,000 worth of equity in the truck, plus whatever has been paid against the balance. In the second example, there’s $6,000 worth of equity, which isn’t much. The balance owing, $17,000, is where your equity lies, provided you’re able to make the final balloon payment. And unless you diligently save a portion of your earnings every month toward that final buy-out, you’ll likely wind up borrowing for that, too.

Then, at the end of it all, when you go to trade your five-year-old truck, you might get $20,000 or $25,000 for it. For all your hard work, you wind up with little more than you went into the deal with in the first place. Makes you think twice about bargaining away your soul for a truck loan, doesn’t it?

There’s another danger in being desperate. Some finance companies structure repayment plans in such a way that the interest is repaid before the principal. You’ll never see the difference from where you stand until you need to sell the truck. That’s when you discover the principal has barely been touched. Deals like this aren’t rare, so it pays to ask how the repayment schedule works.

According to Laura Rideout, an account executive with Tyco Capital of Burlington, Ont., it’s often the strength of the customer that determines the structure of the financing.

“We’re always looking at their personal and financial stability,” she says. “It certainly helps if you’re a homeowner and you haven’t switched jobs three times in the past year.”
Rideout says she can get a customer into a trailer for as little as “first and last” or 10 per cent down, but she admits financing a truck is tougher.

“Experience counts for a lot, as does the way you plan to manage the business,” she says. “Many of the first-timers think trucking is a get-rich-quick scheme, but they overlook the little things like wages and maintenance. We want to see some sense that they know what they’re getting into.”

For first-timers, Rideout looks for at least five years experience as a driver, a stable work history, a good credit record (not squeaky clean, just stable and reliable), and enough cash reserve to run 30 days without a paycheque. She also wants to see a solid business plan that recognizes all the costs and pitfalls of running a trucking business.

It’s not so much about qualifying for the loan, she says, as it is about being qualified for the responsibility.In a promotion that reads like a banner at a car dealer’s lot, International Truck and Engine is offering zero-percent first-year financing when you buy a new truck before the end of this month. It’s the sort of consumer-appeal deal that underscores how incentives have changed the dynamic in the decision to buy new or used.

Typically, to buy new today, you’ll be looking at 10 to 15 per cent down with 9.5 per cent financing over five years. To buy a two- or three-year-old truck, you’ll need about the same amount of cash to start up — 15 to 20 per cent down — but you’ll pay 12 to 14 per cent for the money. In the end, the dollars are about the same, but there’s nothing left in the used truck at the end of the term. The new truck should still have some value, even after five years.

A decade ago, you might have made a case that while the used truck was less expensive to finance, it cost more to operate. At the end of the day, the cost of running new or used was close to the same. Now, with the high cost of borrowing, the new iron looks like a safer bet.

In addition, the new truck might still get you a year’s worth of payment-free operation. Today’s financing plans usually take a truck out to six years of age. By that time, they’re beat, and getting expensive. So by the time you’ve paid off the loan, the truck is worth next to nothing in trade, and you won’t be able to afford to keep it running beyond that time. Plus, few carriers will take on a truck that old, so you’ll be running out of money and options at exactly the same time.

Regardless of what you buy, if you want anything out of the truck when you’re done with it you’ll need to maintain your equity all the way along, just in case the unforeseen happens. And you know it will.