A truck is an owner-operator’s biggest business purchase, but savvy spec’ing and shopping can save plenty.
A truck is an owner-operator’s biggest business purchase, but savvy spec’ing and shopping can save plenty. Here are seven truck-buying tips that you can drive all the way to the bank.
“Name your price!” says TV pitchman William Shatner, and millions of happy Priceline customers do just that when lining up airline tickets and hotel rooms. Too bad that’s not an option when buying a big rig. Or is it?
“My goodness, these things do cost a lot of money, don’t they?” says Howard Abrams, owner of PBS Tax and Bookkeeping Service in Tarzana, Calif.
Faced with the daunting necessity of buying a truck – new models costing more than some people’s houses – owner-operators can indeed assert some measure of control over their single biggest business expense, says Abrams and other owner-operator business experts. If you can’t quite name a price, you can devise a business plan that states upfront how much you’re able and willing to pay. A variety of other sound business practices can help ensure the best price at the lowest interest rate – not just for your next truck, but for all your trucks after that.
- DO THE MATH. The thousands of owner-operator clients of American Truck Business Services in Denver spend on average 15 percent of their gross income on truck payments. An additional 5 percent goes to trailer payments.
When figuring an annual truck payment you can afford, “try to stay below 25 percent of your gross income for the year,” says former owner-operator Russell Fullingim, now owner of Truckers Financial Services in Corning, Calif. “Remember that another 25 percent will be spent on fuel, and once you’ve done that, there’s not going to be much left for anything else.”
Using this formula, an owner-operator who expects a gross income of $130,000 might set $32,500 as his maximum truck payment for the year, which works out to $2,710 a month. As your parents used to say of your allowance, however, you needn’t spend it just because you have it.
If you just had your best year ever, don’t budget your new truck on the assumption that the next five years will be just as flush. One of Fullingim’s clients had an unusually good year in 2005, with $300,000 in income, “and you wouldn’t want to spend 25 percent of that,” he says.
Instead, peg your payments to the reasonable income level you have come to expect yearly. Even if you run a consistently high-income operation, it’ll be even more profitable if you refrain from overspending on a truck.
- SAVE BEFORE BUYING. Don’t buy a truck, Abrams advises, until you have enough savings to make three to six months worth of payments. If all goes well with your business plan, you won’t have to draw upon those savings to keep your truck.
In lean months, though, you’ll be spared the trap too many owner-operators fall into: They put the truck payment on a credit card and saddle themselves with whopping finance charges.
Borrowing is the hidden cost of truck buying, Abrams says, and for many owner-operators, it means the difference between success and failure. “They must have an adequate amount of working capital to draw on,” Abrams says. “They could save a lot of money with proper management of cash.”
How much should you save toward a down payment? The size of your down payment should be based on your long-term business plan, Abrams says. If you plan to drive the truck for years after it’s paid off, then a large initial down payment is a good idea. But if you plan to trade after three years, a smaller down payment actually might save you money, Abrams says.
“A bigger down payment does keep your monthly payments down, but you’re investing a lot of money in an asset that is only going to depreciate in value,” Abrams says.
For most of his clients, Fullingim advises a sizable down payment, because putting down too much is less risky than putting down too little. “Put down at least 25 percent of the total cost,” he says.
Putting down only 5 percent or 10 percent not only increases your monthly payments but also the total amount of interest you’ll pay over the life of the loan. It also likely increases your interest rate as well, and a seemingly tiny difference in that rate can cost you thousands. “Just 1 percent makes a big difference,” Fullingim says.
- SPEC FOR YOUR NEEDS. Know what applications you’ll run and what specs you’ll need. If you’re a leased owner-operator, know your fleet’s requirements. Use resources such as the Overdrive Spec Guide 2006, online at www.etrucker.com (linked in left-hand column).
Keep in mind that many over-the-road applications don’t need 500 horsepower and a 13-speed transmission, and that when you’re juggling weight requirements, bigger payloads may make more sense than bigger iron.
Be wary of compiling too long a wish list of entertainment options and eye candy, especially in an age when a custom set of 10-inch stacks costs $7,000. As a veteran owner-operator, Fullingim learn-ed to appreciate the economy of a stripped-down, no-frills rig.
“In the ’60s, we had cabovers with no air conditioning and no air-ride seats, and we made lots of money,” he says. “In the ’70s, if I didn’t bring home $1,000 a week, my wife was suspicious. Today, people are going overboard in buying trucks with too many bells and whistles in them, things that don’t make them any money.”
- SHOP AROUND AND NEGOTIATE. Too many owner-operators buy on impulse, rather than shopping around for the best terms, Abrams and Fullingim say. Compare prices not just among dealers, but among lenders as well. Haggle. The first offer is rarely the best.
Get your accountant to review the details of any purchase agreement before you sign it. “A lot of people claim the interest rate is lower than it really is,” Fullingim says. “They might say 8 percent when it’s really 10 percent.”
All that fine print was written by experts, and you need an expert to help you read it, understand it and, if necessary, reject it, Abrams says. Often, for example, insurance will be included in the finance contract at rates more expensive than you could find elsewhere.
- CONSIDER BUYING USED OR LEASING. “I point out to my clients that they can make an excellent living buying used equipment,” Abrams says.
A used truck can be an especially good choice for a new owner-operator who wants as little start-up expense as possible, while leasing can be a good option for a veteran owner-operator tempted to add a truck or two to take advantage of a business opportunity.
Such decisions should take into account not just the coming year, but the coming 20 years, Abrams says. For example, if you trade every three years, by your fourth or fifth trade “erosion of depreciation” may have set in, so that you’ve lost much of the tax benefit enjoyed by people who buy less often.
Here’s how it works. If you outright sell a fully depreciated truck for $30,000, that $30,000 is considered a taxable gain by the IRS. If instead you trade in that fully depreciated truck and get $30,000 credit on the cost of a new $100,000 truck, that $30,000 credit also is considered a gain, and it has to be accounted for somehow – generally by allowing you only $70,000 in depreciation over the life of the second truck.
After enough frequent trade-ins, each one failing to give you full depreciation value, you wind up “buying a large piece of equipment without a lot of depreciation to show for it,” Abrams says. If you want to change equipment that frequently, leasing might be a better long-term option than buying.
- MAINTAIN GOOD CREDIT Keeping a good credit rating saves you money on each truck purchase. “The better credit you have, the lower your payments,” because your low risk merits a low interest rate, Abrams says.
If you have a bad credit rating, hold off on buying your next truck until you’ve repaired it – assuming your present truck will last that long. In the meantime, you can do a lot of business planning and comparison shopping.
Free credit reports are now available from the three major agencies once a year, so you can check one every four months to see your overall report. There is usually a small fee to see your rating. Call (877) 322-8228 or visit this site.
- PLAN EARLY FOR RESALEThe real price of a new truck is what you pay for it, minus what you eventually sell it for. Sales people sometimes cry “resale” to justify every imaginable add-on at the time of purchase, but it may make sense to spec at a more basic level. For example, spec the new drivetrain so that it can be upgraded at resale with more power and torque.
Most importantly, do everything you can to preserve your new truck’s value, Fullingim says. The more value your truck retains at trade-in, the lower the cost of your next truck.
That means, among other things:
- Don’t speed.
- Don’t abuse your brakes or transmission.
- Do lots of preventive maintenance.
- Routinely self-inspect.
- Keep everything clean.
- Reduce idling.
Remember that today’s electronic control modules leave few secrets, Fullingim says. In calculating trade-in value, for example, dealers routinely add 30 miles to the odometer for each idle hour, which can lower trade-in value by thousands of dollars – in addition to the thousands already spent on wasted fuel.