Another Way To Buy

Lease-purchase plans aren’t for everyone, but they can work – and work well – as long as you get favorable terms.

In the early 1980s, Jeff Warta had made 46 payments on his four-year truck lease-purchase. With only two payments remaining, the carrier’s lessor went bankrupt.

“My truck was repossessed by the bank to help pay the carrier’s creditors,” says Warta, who lost both his truck and the $51,000 he had sunk into it, though he later completed a lease-purchase with another carrier.

For every horror story such as Warta’s, there is a success tale, too. Among owner-operators driving a truck that has been paid off, 9 percent acquired their rig through a lease-purchase, according to the Overdrive 2003 Owner-operator Behavior Report. Many of them used such a program to begin their careers or to bounce back from financial hardship.

In some instances, though, lease-purchases, as well as straight leases, are often looked upon with skepticism by prospective owner-operators. This is partly because the agreements are perceived to take advantage of those in financial trouble by charging too much for the truck, or for interest on the loan, or for a maintenance escrow. Complications can arise if the lessee wants to change carriers because he often loses most or all of what he’s invested in the program.

Truck leasing generally appeals to two types of truckers. The first is the aspiring owner-operator with little money who is attracted by leases that typically require little or no security deposit. The other type is the experienced owner-operator whose credit suffered after falling on hard times.

Keith DeHaven, for example, went bankrupt as an owner-operator and decided to re-establish his credit. “I lease-purchased three vehicles through Highway Sales and put them on with Dart,” DeHaven says. Highway Sales is a leasing company with ties to a number of carriers, including Dart Transit, which has helped 1,200 lessees complete a truck purchase since 1988. “I am now on my second straight buy with the help of Highway Sales. I am driving a new Pete and have six grand in the bank.” In a straight buy, the carrier acts as a seller in the same way that a dealer would.

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In many cases, though, because of high interest rates and fat escrow requirements, “Leasing is the most expensive way to own a truck,” says Kevin Rutherford, owner of Whiteline Business and Financial Services. Even when a lessee is willing, due to bad credit or hard luck, to bear the extra expense, calculating that additional cost can be difficult.

“It is easy to hide the amount of interest in vehicle leases,” says Todd Amen of American Truck Tax in

Denver. “You need to know more than the monthly lease payment. You need to know the total purchase price. Some carriers are charging 15 to 20 percent interest.”

DeHaven paid 14 percent interest on the $70,000 lease-purchase of his 1995 Freightliner FLD 120 in 1996, when his credit was still damaged. His monthly payment of $1,500 included a little more in interest than he would have paid if he’d been able to finance with a bank. In addition, he was required by Dart to finance disability insurance to cover his truck payment and a portion of his income, his highway use tax and physical damage and bobtail insurance.

The cost of interest isn’t the only factor to consider regarding the total investment of a lease-purchase. Given the price and condition of a truck at the beginning of the lease, you should make an informed estimate of what it will be worth by the time you take ownership. Otherwise, you run the risk of having very little equity to put toward your first trade. Some buyers have come to the point of making their final large “balloon” payment, only to find that the truck is worth less than the balloon.

DeHaven did his homework and expects to come out well with the equity in his 379 Peterbilt powered by a C-15 475 Caterpillar that he bought new in 2000. “When I pay the balloon payment of approximately $15,000 at the end of this deal, my Pete will be worth between $30,000 and $40,000,” he says. “I could walk away with about $20,000 in my pocket.”

Dave Williams, a leased operator with PGT Trucking of Monaca, Pa., says he was given the maintenance records of his truck to examine before signing his lease. Williams attributes his good leasing experience so far partly to PGT’s backup. “PGT will help you with breakdowns and will provide a truck for you to use if you need big repairs,” Williams says.

“The trucks we lease have been thoroughly gone through and are ready to make money,” says Donn Stuhlmacher, manager of recruiting at PGT. “If there are mechanical problems, we will support the lease operator. We pass along the total fuel surcharge and our success rate is very high.”

Another important consideration is whether the carrier will provide you with enough work over the life of the lease-purchase to make your payments and still live comfortably. “There is not much margin in trucking under the best of conditions,” says Todd Spencer, Executive Vice President of the Owner Operator Independent Drivers Association. “Making an expensive lease-purchase deal work can mean making tremendous personal sacrifices.”

Jeff Wilson had a lease-purchase with a large carrier that repossessed his truck. “I will never get my truck back, but I am suing for damages,” he says. “They stopped giving me freight, so I couldn’t pay.” The carrier argues that freight slowed down during the first quarter, but there was no intent to starve Wilson out.

Also sensitive is the size and handling of escrow accounts. While every owner-operator wants control of his own finances, a fairly administered maintenance account can be helpful to the lessee who lacks the self-discipline or experience in putting money aside for maintenance. Nevertheless, you should check out escrow requirements thoroughly before signing a lease-purchase.

The contracts often require an initial security escrow of $1,000 to cover any expenses the lessee fails to pay. Maintenance escrows, which are funded throughout the length of the lease-purchase, are usually required. These payments can become a point of conflict for operators who assume that money will be returned at the lease’s end, but then get little or none of it back because of carrier charges. Spencer at OOIDA notes that a lease contract should state the precise purpose of escrows and that all unused escrows should be returned, with interest, at the end of a lease.

Tina Stoneburner, a freight agent and small fleet owner in Ohio, says she has a hard time paying a maintenance escrow of 12 percent. Stoneburner, who lease-purchases three trucks through a Pennsylvania-based carrier, complains, “Sometimes the carrier charges me 12 percent of the gross revenue and sometimes they charge me on the net,” she says. “They’re eating me alive.”

The potential loss of not only escrow money, but potential equity built through a lease-purchase, makes it essential that you figure out whether you can remain with a carrier for the life of the lease. Should you change carriers, it is extremely rare to be able to move a truck under a lease-purchase. Very few companies will allow a lessee to buy out for a percentage of the truck’s value.

A straight buy should allow you to move the truck. That’s the case at CFI in Joplin, Mo., says Tom Hatfield, director of recruiting. CFI offers truck buys to drivers who have at least one year of a good work history with the carrier.

Some carriers will not make a lease-purchase document available until orientation is over, and then might try to rush the signing process. Wilson, the lessee who’s suing a former carrier that repossessed his truck, cautions, “My carrier dispatched me with a load before I had signed on. They told me to sign it on my way through next time. They also told me I could not use any accountant except one they chose.”

Don’t waste your time completing orientation only to discover the lease-purchase agreement has pitfalls. “If a carrier will not allow you to take a lease to show your lawyer and accountant, you should not sign it,” Spencer says. Furthermore, Rutherford says, “You have to understand it for yourself.”

Part of that understanding involves knowing what every line on the settlement means – and making sure critical things are not omitted. A settlement should tell you everything that will be withheld, how those items are calculated, and interest paid on escrow and maintenance funds.

Lease-purchasing may be the only way for credit-impaired drivers to begin their careers as owner-operators. If you go this route, choose a reputable carrier, make sure you understand the full implications of your commitment, and make the business of ownership your first priority.

Evaluating the merits of acquiring a truck by lease-purchase versus other means can be tricky. “Not all lease-purchases are created equal,” says Steve Gundale, communications manager at Dart Transit, which has run a successful program for years.

Donn Stuhlmacher at PGT Trucking in Monaca, Pa., says he can set up a lease-purchase in which the truck itself, apart from interest and other fees, will cost the lessee about the same per month as it would cost in a traditional dealership purchase with a loan from a bank or other financial institution.

Stuhlmacher says principal and interest on a 1999 International with a 435 Caterpillar would cost $38,000 under a lease-purchase. Under a traditional purchase, he estimates it would cost $32,000 to $34,000, assuming the buyer has a good credit rating. PGT is charging 12 percent interest, while a lender might charge anywhere from 8 percent to 14 percent, depending on the buyer’s credit. PGT’s terms are for four years; a regular purchase would probably have a three-year term, he says.

The note through PGT also will include fees to cover normal operating expenses. “We provide licensing, permits, bobtail, physical damage and workman’s comp and fold them into the weekly payment,” Stuhlmacher says.

PGT’s $1,000 escrow can be paid in 20 $50 payments, while a regular buy would require a downpayment of perhaps 20 percent of the purchase price, he says. “At PGT, there is no balloon payment at the end,” Stuhlmacher notes. “When the lessee makes the last payment, he owns the truck.”


Jon Seibel at Highway Sales, a truck leasing company, and Paula Hudson at Truckers’ Home Office, a trucker accounting firm, warn lessees of these points:

  • Some leases make you pay extra for driving beyond a certain number of miles. You should be free to run enough to make it worth your while.
  • Some agreements require you to do maintenance on a predetermined schedule. This allows the carrier to require expensive overhauls near the end of the lease, for example. You should be able to set your own reasonable schedule.
  • Maintenance funds might be excessive. New trucks can exist on a 4-cents-per-mile maintenance budget; add a penny for every year of the truck’s age. Don’t pay more than this amount.
  • You need to understand how the Internal Revenue Service views the agreement. If the lease does not include a buy option, you cannot depreciate the vehicle, but you should be able to write off payments as an expense on Schedule C. It is unlikely this write-off will equal what you would have realized from writing off depreciation.
  • A carrier should be willing to show you the truck’s title if the agreement includes a buyout. Check the serial number against the truck.
  • All settlement deductions should be clear and proper. Some carriers, for example, have deducted worker’s compensation premiums when their state requires it to be paid by the carrier. Consult your lawyer on such details.