One of the few bright spots regarding truck trading is that used truck prices have fallen.
Just as subprime loans undermined the home mortgage industry, the similar practice of lending to buyers who wouldn’t normally qualify has handicapped the truck lending business.
Defaults on truck loans, like home foreclosures, have soared. Truck repossessions rose more than 100 percent in 2007, according to Nassau Asset Management, and company CFO Robert Malichio says they’ve remained equally high in 2008.
The resulting tight credit market is stifling truck sales for dealers and raising high hurdles for owner-operators who in the recent past would have no trouble qualifying for a loan. No one knows if the situation will get worse or how long it will last.
With some new- and used-truck financiers requiring higher credit scores and, in the most extreme cases, up to 50 percent down in cash, many owner-operators will have to re-evaluate their cash situation and trade cycles. Those with money in the bank, plenty of freight and a low-mileage or well-maintained older truck can weather the storm relatively easily. But those with tight margins, too much debt or a truck in bad need of replacement could face a very difficult period.
Rob Herndon says deals with his clients at Peterbilt of Bristol, in Bristol, Va., reached their apex of ease a couple years ago when he could get a $100,000-plus loan approved in less than an hour from one of his many financing sources, such as Key Equipment. “Now it takes until tomorrow for them to get it done,” he says. “They want financials from last year for anything over $100,000.”
Owner-operators with credit scores below 680, says Herndon, can probably forget about financing. He tells of a recent customer who had lifted her score to 673. His financial contact told him, “If she doesn’t have a 680, I won’t look at her.”
Jay Thompson, president of Transportation Business Associates, points to the collapse of the old Associates Commercial, once the nation’s largest truck-loan servicer. “They disappeared after 2000 because of lax lending standards,” he says. “They’d finance anybody. It was kind of a standard joke – financing wasn’t about who had the best terms, but who could get you approved the quickest.” But after Associates disappeared, banks and other lenders rushed in to offer easy credit.
“Almost since deregulation – for the last 20 years, certainly – there’s been fairly loose credit,” Thompson says. Many lenders operated on an apply-for-it-and-you-get-it lending standard. As loan defaults have risen dramatically, most “quickie financiers” have left the truck market, says Thompson, and today no one is filling that gap.
Terry Scaggs, a Boise, Idaho-based flatbed owner-operator, blew the engine in his 1997 Kenworth T600 in 2007. He opted to rebuild the engine with a $21,000 loan financed through Trebar, a Kenworth and Mitsubishi-Fuso dealer with five facilities in the Pacific Northwest. While his credit rating had deteriorated, Scaggs’ solid relationship with Trebar President Robert Barrett enabled him to secure a loan at 13.5 percent – $830 a month for 30 months.
“At the time, the 13.5 percent was towards the upper end of our rate scale,” says Barrett. “It was the result of the deterioration of his credit. Were it not for the fact of his longtime relationship with us, we’d have probably turned the loan down.”
Scaggs could afford the monthly payment, so he doubled down on maintenance and stayed in business.
Barrett says Trebar’s main customers, owner-operators and small fleets, are pulling back. “Only those hardy souls who feel they must upgrade or replace equipment are buying,” he says. “We expect this pattern to continue for the duration of this downturn, which probably means most of 2009.”
Lenders such as Trebar, truck makers and large fleets are now good sources for new owner-operator investment capital, says Thompson. Fleet programs particularly, he says. “Because they disburse that truck payment out weekly, before they’ve submitted the rest of the settlement to the independent contractor, they get their money first, and they’re much more able to help keep people from getting into trouble than somebody paying on a monthly basis.” Also, they have the capability to help by cranking up the debtor’s miles.