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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.

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“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.

Schneider National’s Mike Bethea, head of the fleet’s 2,500-member owner-operator program, says its financial arm has remained strong, mostly because it’s retained stringent up-front requirements. He points to Schneider’s emphasis on strong front-end training.

“We run a cash flow with them” before they get into the business, says Bethea of first-time owner-operators. “What’s your truck payment? Do you have a truck picked out? What’s your bobtail insurance? We stress that they try to keep themselves productive. We see what their real potential earnings are.” When they sell a truck, they include a year of free service with ATBS, the owner-operator financial services provider.

SelecTrucks, moreover, with a network of used-truck dealers owned by Daimler, is utilizing Daimler Financial to move trucks with an offer of zero-down, 4.75 percent, on qualifying trucks to customers with good credit. That translates to what Daimler Trucks Remarketing Manager Drew Backeberg says is an owner-operator with a high credit score and a good borrowing history – the above-average “A or B credit” folks, as he puts it. To those with average credit, Daimler is offering a down-payment match of up to $1,750 as an option.

Qualifying trucks are 2003-’04 Freightliner Century Class and Columbia models with anywhere from 350,000-625,000 miles.

On the other hand, at least some trucking-specific capital sources are doing the same as many banks – raising interest rates. “Normally we would price within a range of about 5 percent” between the lowest and highest rate, says Trebar’s Barrett, but “now we are quoting anywhere from 9.9 percent up to 18.5 percent.”

Backeberg says truck loan interest rates have risen substantially this fall. For those with the best credit, he says, many traditional sources have been quoting 12 percent to 13 percent.

Bargains are most likely to be found in the used-truck market. “Used truck prices are lower than they used to be,” says Eric Cook of Aurora, Colo.-based Peak Trucking Consultants. That’s partly due to repos flooding the market.

Don’t look for similar bargains on orders from original equipment manufacturers. “An OEM price war is highly unlikely,” says Eric Starks, president of FTR Associates, publisher of the North American Commercial Truck & Trailer Outlook. Truck makers are not “really worried too much about their market share” and are just trying to keep their margins stable.

Truck OEMs have expanded parts and service lines to accommodate what is already a year-and-a-half slowdown in truck sales, Thompson and Starks say. “They were hoping they would have turned around by now,” says Starks. Keeping to the same pattern of low inventory, overhead and sales won’t be too much of a problem for them, analysts suggest, which means little bargaining leverage for individual buyers.

ATBS Vice President Richard DeForest characterizes the credit availability situation for responsible operators as a “temporary problem. You’ll just have to plan to work a little better, or maybe work a little more” before the economy comes back up.

“Stay productive,” says Schneider’s Bethea. “You can’t go home if the freight’s out there, because you don’t know what might happen next week.”

And when a bad turn happens, it’s not necessarily the wisest move to go deeper in debt just because you can qualify for a loan, as Kansas City, Mo.-based owner-operator Dave Smith knows. With nearly 900,000 miles on it since its last overhaul, Smith’s late-1990s Caterpillar 3406E went down in September due to a damaged cylinder. With a repair estimate of $7,000 to $9,000, and an uncertain market ahead making him reluctant to borrow money, he opted instead to flag for windmill blade haulers in a smaller truck and save for year’s end, when he’ll repair the engine.

Before he parked his 10-year-old Peterbilt, Smith had it outfitted with bypass filtration and a lubricity-enhancing system. Smith kept the system well-tuned and installed an Idlebuster auxiliary power unit.

Keeping an old truck running efficiently is a smart choice many have to make in today’s credit environment. “We’ve got to get as much out of this equipment as we possibly can,” Smith says.

Getting your credit report
Yesterday’s acceptable credit score might not cut it in today’s market. You can stay current with your rating by checking before you ever contact a lender.

The Fair Credit Reporting Act requires consumer information-gathering and reporting agencies to provide a free copy of your credit report once a year.

Maintaining a good credit report generally requires on-time payment of all bills, including personal ones, low short-term debt levels and other sound financial practices. With your free credit reports, the rating agencies also offer, for a small fee, your credit score. If it’s above 700, that’s typically considered to be good – in the high 600s, however, is often good enough to get relatively favorable loan terms.

To obtain a copy of your credit report, contact:

(800) 525-6285

(888) 397-3742

(800) 680-7289

A lean year coming for new trucks
The industry has had plenty of speculation about the extent of a 2009 pre-buy that might precede the introduction of new emissions technology in the 2010 engines. Now, given the tight credit market and slowing freight, little pre-buy can be expected, says Eric Starks, president of FTR Associates. Reports showed the economic chaos had put a huge damper on September orders from manufacturers.

Transportation analyst Jay Thompson characterizes the long-term rise in new-truck sales as an investment bubble that peaked with the 2006 pre-buy in lieu of the new technology in 2007 engines.