Enlightened Borrowing

Here are four words you don’t want to hear when you’re in a dispute over money: It’s in the contract. They usually mean you’ve missed something and, chances are, it’s gonna cost you in real dollars, in a business relationship, or both.

When you’re talking about a truck finance contract, the consequences can be especially steep, since a new tractor can cost as much as a house. You want to truly comprehend the terms of agreement you’re about to sign. There’s plenty of important fine print in that contract, not the least of which are the actual finance rates and length of term. But here are six more areas you can’t afford to overlook:

Early Payout Penalties: Finance/leasing companies and banks often handle early payouts differently. Sometimes there is no penalty at all–the payout is simply the principal amount outstanding. An example of this would be an open loan or line of credit at the bank. As a penalty, many equipment finance companies charge five per cent of the principal amount outstanding but will forgive this penalty if you refinance with them on your next truck.

The worst-case scenario is that you have to pay the balance of all outstanding payments. In effect, you are paying all the remaining interest on the loan up front. This is common on early lease payouts.

Late Payment Penalties: Some finance/lease contracts allow you a grace period after your payment is due to make that payment without penalty (usually five to 15 days). After this period, a penalty of about five per cent is added to the amount outstanding and a higher rate of interest (18 per cent or so) is usually applied to the overdue amount. Some lenders have more forgiving terms than others, so it’s important to compare.

Insurance: Truck insurance requirements vary depending on the lender. Most require a $5,000 maximum deductible and a minimum $1 million liability coverage. If you do not have the right coverage then you need to talk with your carrier or insurance agent.

Many owner operators pay far too much for credit life and credit disability insurance on their finance contracts. If you don’t get competing quotes for this type of insurance then you may end up paying thousands more than you should. Most of these insurance premiums are rolled into your financing and are prepaid to the insurance company; therefore, you are paying additional interest on this insurance. In many cases, you would be better off buying a monthly pay type of insurance.

Subleasing: Read the contract you sign very carefully. Many finance/lease documents don’t allow for subleasing.

Option to Purchase: You may think you can simply walk away from your lease at the end of the lease term, but you may be on the hook for additional costs. Many truck lease purchase options are guaranteed. This means if you walk away from a lease with a purchase option of $25,000 and the finance company sells the truck for $20,000 then you are responsible for the $5,000 difference.

Personal Guarantees: If you are a sole proprietor, your purchase or lease agreement is, in fact, a personal guarantee that you will pay back the loan or meet the lease requirements.

If you’re incorporated, you may have to sign a personal guarantee for the corporation. There are two main types of personal guarantee–continuing and specific. A specific guarantee applies to the specific piece of equipment you are purchasing. The continuing guarantee applies to the current equipment you are financing in addition to all future equipment purchases or leases made with that finance company. In most cases, with the continuing and specific guarantees, the equipment is the collateral for the loan.

Banks will often use a different kind of guarantee called a general security agreement. Under this type of agreement, the bank holds much of your personal property as collateral against the financing in addition to the equipment.

Another type of guarantee you may see is a cross-collateral guarantee. If you have multiple loans or leases with one finance company, all of your equipment is used as collateral against the other loans or leases.

In summary, be prepared. Plan ahead and take your time. The faster you rush into a deal, the more likely it is you’ll pay more than you should. You can always use a second opinion from your accountant to review the financial details and make sure the deal is fair and meets your needs.