It’s the American way: Borrow as much as you can to buy the most expensive truck (or house or car) as long as you can make the monthly payment. Sure, making ends meet is important, but that’s not the big picture.
The problem with using monthly payment size as the sole guide is it pushes you to the maximum loan length. For new trucks, 60-month financing continues to be owner-operators’ favorite option.
“A lot here lately have been wanting to go to 66 and 72,” partly because of expensive fuel, says Brenda Oliver, finance and insurance manager for Premier Truck Centers, which has three Alabama locations selling Volvo, Mack and GMC trucks. Even though buyers are presented with total loan charges, “They’re more concerned with monthly payments,” she says.
“That’s their hot button,” agrees David Henderson, manager of Peterbilt of Mississippi and six other dealerships. “Some of them want to stretch it out to 72 months, but we really don’t like that because the guy’s upside down in the truck for years, so we try to push it to 48- or 60-month financing.”
Some of his small-fleet customers have been considering fair market value leases, which leave no residual amount due at the end because there is no purchase. Instead, the customer turns in the truck.
“The big deal with that is whoever the finance source is captures the depreciation rather than the end user,” Henderson says.
Whatever type of financing you choose, keep in mind that interest cost easily can consume 2 percent to 4 percent of your gross revenue. Do what you can to keep that cost down:
- BORROW LESS. If you can hold on to your current truck longer and save at a faster clip, that’s more money to put down next time you trade.
- PAY BACK QUICKER. If you’re used to 60-month loans, see if a 48-month deal would work.
- IMPROVE YOUR CREDIT RATING. Pay bills, including all personal bills, on time. Pay downs debts. Avoid transferring credit card balances. Don’t sign up for new credit cards.
THE RISING COST OF TIME
Assume your credit rating qualifies for a 10 percent loan on $76,000, the average amount financed by owner-operators buying a new truck, according to the Overdrive 2007 Owner-Operator Market Behavior Report. As a percentage of the total cost of the loan, the interest costs amount to 18 percent on a 48-month loan, 22 percent on a 60-month loan and 25 percent on a 72-month loan.
Owner-operators continue to favor fixed-rate financing for the certainty of knowing what the monthly payment will be for the life of the loan.
“One time, when interest rates were down so low, people were playing around with some adjustable-rate-type stuff,” says David Henderson, who manages seven Peterbilt dealerships in the Southeast.
The occasional buyer still wants to extend a first payment 45 days, and can do so as long as his credit is strong, Henderson says. A logger, for example, might want to delay a first payment or have a skip-payment plan to handle the winter slowdown.