Chosing whether to buy or lease a truck is one of the most important decisions of your owner-operator career.
This is excerpted from the Overdrive 2008 Partners in Business manual for owner-operators. The next Partners in Business seminar will be at 2 p.m. Aug. 22 at the Great American Trucking Show in Dallas. To order a manual, call (800) 633-5953, Ext. 1301. Visit www.PIBlive.com for more excerpts and information. The seminars and the manual are brought to you by Overdrive, ATBS and Castrol.
If you’re among the 90 percent of buyers who can’t afford to pay cash outright for a truck, one of the most basic decisions you need to make is whether to buy or lease. Each option has advantages and drawbacks.
PURCHASING. When you take out a loan and arrange to finance a truck, you are buying the vehicle and will own it at the end of the contract. A loan requires monthly payments, usually over three to five years. Your monthly payments include principal and interest. With many finance contracts you pay more interest per payment in the early years and pay down more of the principal per payment in the later years.
LEASING. Leasing is similar to renting. You pay for the use of a truck that is not actually yours. When the lease is up (usually in three to five years), you do not own the truck as you would if it were financed. Instead, you return it to the lease company. However, you can elect to purchase the truck at a predetermined price. This residual value of the truck is agreed upon in the original lease document. Leasing is different from buying through a carrier’s lease-purchase plan.
Leases vary greatly, but two types are most common:
OPERATING (FULL-SERVICE) LEASE. The lessor furnishes the truck and is responsible for maintenance, taxes and permits. At the end of the lease, the lessee walks away.
TERMINAL RENTAL ADJUSTMENT CLAUSE (TRAC) LEASE. This type of lease is commonly used by trucking companies. At the end of the lease term, instead of turning in the equipment, the lessee is responsible for the residual value of the truck.
Under a TRAC lease, you make a small down payment, which usually equals about two months’ worth of payments under a traditional financing arrangement. At the end of the lease – typically four or five years – you buy the truck for its residual value by making one large payment, often called a balloon payment. Or, at the end of the lease, you can ask the lessor to sell the truck. If he gets more than the residual value, you get the difference; if he gets less, you pay the difference.
Truck leasing tips
- Spec the most common type of truck for your application, for the sake of resale value.
- Compare the stated residual value with the resale value of a similar truck. Ask to see the truck’s maintenance records before signing the lease.
- Don’t rush. Check out two or more lease deals. If possible, have an accountant or attorney look at the deals. Try to negotiate.
- Get a written cost comparison between an outright purchase and a lease from each dealer. Have your accountant assess the effect of each option.
- Make your lease term as short as possible. Try not to go beyond four years.
- Know what happens at the end of the lease.
- Make sure there are no mileage limitations. If there are, make sure that they are well within the mileage plans of your operation.
- Be aware of alteration restrictions, such as painting or adding accessories.
- Make sure that all warranties pass through to you.
- Find out when payments are due and where to send them.
- Find out what to do in case of an accident or damage to the truck.
- Understand the conditions under which you can get out of the lease.
- Before signing a lease, consider maintenance funds. A new truck can exist on a 2-cents-per-mile maintenance budget; add a penny for every year of the truck’s age.
- 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.
KNOW YOUR CONTRACT
Make sure you understand a lease before you sign, including knowing what every line on the contract means – and making sure critical things are not omitted. It should tell you everything that will be withheld, how those items are calculated, and what interest is paid on escrow and maintenance funds.
- 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.
- 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.
- Never sign a lease or purchase contract you don’t fully understand. If you’re uncertain about any points, have your lawyer or financial services provider review the contract with you.
DEFINE YOUR BUSINESS
For the majority of owner-operators, the only way to be profitable is by running 11,000 or more miles per month. This could mean being on the road three or four weeks in a row with little leisure time. If you have interests that require you to be home every weekend or you are on a set schedule, you might want to investigate short-haul, intermodal or regional operations, which will affect your choice of truck.
Before talking with a sales representative about buying or leasing, make sure you can answer a few key questions:
Does your carrier have tractor restrictions that will affect your purchase? Some companies won’t use trucks that are more than 4 years old, or may require additional items such as a headache rack. Wheel base, gross vehicle weight and a sliding fifth wheel also may be considerations.
What fees apply to you as an owner-operator? Are you required to pay the Federal Highway Use Tax (FHUT) before you can drive? Are you required to buy base plates at startup? What are the deadhead miles to your first load? How much will you need as a down payment for insurance? Does your carrier require additional purchases, such as a Qualcomm system? When are these required? How will you pay for additional startup costs?
What are you being paid per mile and what are the average miles per month you can expect to run? Get advice from dispatchers and other owner-operators about actual miles you can expect. They may be more candid than other company representatives.
Are you running on flat land or mountains? Do you want top-end speed or pulling power? Being able to answer these questions will help to determine what horsepower and rear differential ratio you need.
Finally, spend some time researching the type of freight you want to haul. By knowing what industry you will haul for before you buy or lease a truck, you may uncover hidden costs and specific requirements that will influence your purchase.
WHAT ABOUT BUYING USED?
There are more ways to evaluate a used truck than there are tires to kick on a tractor-trailer. Fortunately, most dealerships and authorized maintenance facilities have the equipment to download information from a truck’s onboard computer. If you are buying a used truck, ask to see a copy of the download. It can be a real eye-opener.
The report will provide more information than you need, but carefully review the following items: idle time, brake actuation per thousand miles, the number of panic stops per thousand miles and time spent in each gear. Then compare your findings to statistics from your independent mechanic. For example:
- If a truck shows a high percentage of time spent in low gears, you can draw the conclusion that the truck either ran mountains or spent a lot of time in cities.
- The brake actuation ratio will tell you if the prior owner drove the truck hard. Usually a higher number here represents constant speeding.
These are just two ways of using engine data to your advantage as you decide whether a used truck is in good shape and worth the price.
While you’re asking for crucial paperwork, also ask the dealer for a record of the truck’s maintenance history, including oil analysis. Any well-managed fleet truck should have this.
Other things on any savvy buyer’s checklist include:
INSPECTION. Have the truck gone over by a trusted technician, independent of the dealer, ideally with you present to make notes and ask questions.
TEST DRIVE. Don’t just do the test drive bobtail. Find out how the truck handles with a full load, the way trucks were meant to run. A good dealer will have some way to make that happen.
COMPARISON DRIVE. If you’re looking to choose from a matched set of fleet trucks, drive more than one to be sure to exclude one that sounds or performs off-kilter.
SURFACE CLUES. A shabby exterior, a trashed interior, doors that won’t shut right, windows that rattle – such signs often indicate an owner who also didn’t care about critical maintenance tasks.
TIRES. Scrubbing, feathering or other irregular tread wear points to alignment, tie-rod or drag-link problems. That’s why some used-truck dealers put new tires on a truck first, a “For Sale” sign second. If you’re suspicious, ask to see the old tires.
COOLANT. Whether it is conventional or extended life, coolant should be its proper color, not muddy. Discoloration could indicate a system problem.
GUARANTEE. A dealer confident enough to add his own warranty to any remaining factory warranties is a good sign. Remember that such peace of mind typically costs extra up front. Dealers commonly spend anywhere from $2,500 to $5,000 on a truck to get it ready for resale.
BLUE BOOK. If a price is too good to be true, be wary. Not too far down the road, you’ll be paying the difference between the list price and the Blue Book price – and probably more – in repairs.
TESTING. Here are three of the more technical tests you should pursue, because they can reveal certain problems with precision:
- A dynamometer or “dyno” test determines engine strength by measuring drive wheel power. While it’s running, a technician also can look for leaks, because the engine will be at maximum temperature. Most dealerships don’t have a dynamometer, and the nearest might be far away from the truck you’re interested in. The cost is between $100 and $200, but you get plenty of valuable readouts.
- A blow-by test puts pressure on each cylinder to measure air loss, thereby determining the condition of the piston, rings and liners, valves and head gasket. It likewise produces great information, but poses the challenge of finding a shop with the right equipment, most likely an engine dealer. The cost is between $100 to $175.
- Analyzing engine oil by measuring worn material in the oil can provide a picture of the engine’s condition, though it’s of limited use unless you have access to a series of readings over time to spot trends. A similar analysis of the lube in the rear drive axles can examine differential wear.
Warranties are a major source of misunderstanding. It is important to know what the warranty covers and for how long.
One of the biggest misconceptions is that warranties are bumper-to-bumper. Most warranties – especially on used trucks – are limited. Take as much time as you need to understand the warranty being offered.
Gain a solid understanding of claim procedures, such as who accepts and rejects claims. You may even want to ask what criteria are used in the decisions.