Making the truck acquisition decision: To lease or purchase?

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Updated Feb 6, 2018


It’s no secret that affording a new tractor has become more unrealistic for owner-operators and many smaller carriers over the past decade. New trucks are “up to $140,000 to $150,000,” says Scott Anderson, Rush Truck Centers senior vice president. Much of the increase has been caused by round after round of new emissions standards, driving up engine costs substantially.

In the recent past, purchase of a below-$100,000 truck often came with a “48-month full payout,” Anderson says. Traditional loan terms were geared to finishing payments before warranties ran out, allowing many buyers to keep maintenance expenses low and maximize their trade-in value.

Now, given the size of monthly payments, he says “60 to 72 months is not unusual.” Even 84 months is not uncommon, particularly with owner-operators, says Troy Dickens, general manager of Rush Truck Centers’ location in Nashville, Tenn.

For a borrower with decent credit, a note at 7 percent interest, with zero down, for 60 months would require a $2,558 monthly payment. Not so long ago, an $80,000 truck under the same terms could be paid off in one less year for just $1,916 a month.

“In years 2002 to 2005, owner-operators buying stock trucks were a much larger percent of our sales mix than today.” —Troy Dickens, general manager of Rush Truck Centers’ location in Nashville, Tenn., on the effect the rise in equipment cost and other market dynamics has had on owner-operator purchasing“In years 2002 to 2005, owner-operators buying stock trucks were a much larger percent of our sales mix than today.” —Troy Dickens, general manager of Rush Truck Centers’ location in Nashville, Tenn., on the effect the rise in equipment cost and other market dynamics has had on owner-operator purchasing

This shift in affordability has made leasing or lease-purchasing a growing alternative. Most owner-operators exercising this option favor the latter for the right of ownership it grants, with asset equity at the lease’s end. The considerations in evaluating any purchase/lease decision range from the total cost over the deal’s terms, the source, tax implications and individual long-term business needs.

Most owner-operator new-truck customers stick with tried-and-true purchase loan financing. Anderson estimates 80 percent of owner-operators leave Rush Truck Centers locations with a purchase agreement rather than a lease.

“A driver that has a lot of equity, cash to put down, good credit, etc., will likely do a straight finance deal where he is the title holder to the truck” and gets the depreciation benefit on his taxes, says Todd Amen, president of business services provider ATBS.

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A “driver that has little money down, poor credit, etc., will likely do a lease where the finance company holds the title to the truck,” Amen says. “There are many reasons for this, but one of the most significant is that these are higher turnover/repo programs.” If the driver can’t keep up with payments, “the finance company can repo and reseat the asset much faster and cleaner if they are the title holder.”

Variations on that thinking abound. The terminal rental adjustment clause (TRAC) lease, the basic form of the lease-purchase, is intended to allow shared responsibility between the lessee and lessor.

It gives the owner-operator the right of ownership at the lease’s end while reducing cash outlays over that term. The operator can choose to pay the residual, or balloon, at the term’s end or opt to take whatever equity he or she may have – if the truck is worth more than the residual amount owed – and move into a different truck, using the equity as a down payment. Secured directly with a dealer’s finance department, a TRAC lease generally will be available only to those with better credit than is required of a traditional loan in today’s world, says Dickens.

As to why many owner-operators don’t take advantage of a deal that costs less in the long run, Dickens says, “I don’t know that it’s always offered to them” given the higher credit requirement.

More sizable carriers’ generally higher-cost lease-purchase programs traditionally have filled the gap between the less-creditworthy owner-operator and TRAC lease financiers, as Amen suggests. Carrier-affiliated leasing companies lease their trucks to drivers in an effort to increase retention, instill the pride of ownership in drivers with new “skin in the game,” or simply to profit from the deals.

The rising cost of trucks, Amen speculates, may be having an effect in boosting the number of purchasers driven toward such leasing arrangements simply due to the greater financial liability that high-cost equipment puts on the business, giving traditional lenders and lessors more pause.

In Overdrive’s 2015 truck purchasing survey, just 14 percent of respondents reported leasing their current truck in one form or other. But that’s up significantly from a similar Overdrive survey question asked in 2009, in the depths of the recession, when only 4 percent of respondents reported leasing.

Have you ever leased a truck?

More recent polling (above) also showed that the lease option had been a reality at some point in almost half of all readers’ careers. That’s evidence of the importance such arrangements traditionally have held for those with shaky credit or without access to thousands of dollars in start-up capital for a down payment.

Ways to lease and own
**Terminal rental adjustment clause lease: The TRAC lease often is referred to as the lease-purchase. The lessee/owner-operator retains the right to ownership at the lease’s end. That’s fully secured with the payment of a residual value, often a percentage of the new truck’s purchase price, 10 percent to 25 percent being common. Daimler Truck Financial Services spells out variations on the TRAC lease on its website detailing finance options.
**Modified TRAC lease: Like a basic TRAC lease, a residual value is agreed to at the lease’s end, but with potential variations at that end for shared responsibility for the residual.
**Zero-TRAC lease: This option is structured without a residual at the lease’s end, when the owner-operator technically purchases the truck for its fair-market value, but the leasing company refunds that amount, already paid in prior lease payments. Advantages include little to no cash outlay at the lease’s end.
**Fair market value lease: This kind of lease, though rare, offers the owner-operator the exclusive first option to purchase the truck for its current fair market value or walk away from the deal by returning the truck “subject to inspection and certain return conditions” and potential mileage restrictions, notes Daimler Financial.

There are many examples of owner-operators finishing out a lease term and taking ownership of the truck from a carrier program, but horror stories also abound.

Carrier lease-purchase programs generate the most controversy for practices that favor the company at the owner-operator’s expense. Common complaints include abnormally high weekly payments, mileage reduction toward the end of the contract, undisclosed fees and charges, and the inability to transfer the leasing arrangement to another carrier.

But some carriers live up to the commonly expressed intention of developing an owner-operator base and helping contractors develop their businesses.

Pathway Leasing, which grew out of a previously ATBS-affiliated leasing business, partners with carriers to structure programs “where the driver can be successful,” says company head Matt Harris. Ideally, that means operators “lease a truck once and complete the lease in a good equity position at the end.”

Pathway’s leases are for late-model equipment, not necessarily new equipment, says Bill McClusky, in a maintenance consulting role with the company. “As part of the lease agreement, we pull x amount of dollars into their maintenance fund each week,” he says. “When they need repairs, they have funds available.”

McClusky says he’s available for advice on “what types of shops they need to be going to.” He spends time “looking at estimates and invoices and making sure the shops are treating them fairly” and “that they’re not under-repairing or over-repairing.”

In evaluating any carrier’s lease, do diligent research on the carrier and analyze the lease carefully, taking into account all costs and services. If monthly payments are well above what a new- or used-truck dealer’s finance manager might be able to offer given similar terms, and ancillary services such as maintenance, plates, replacement trucks and the like aren’t included in the deal, be wary.

If you have questions after reading the contract, consider hiring a lawyer or financial adviser to review it. Make sure items such as down payment, weekly or monthly payments, maintenance escrow account, length of contract and what you’ll owe at the end of the agreement are spelled out. If it’s a lease with a simple walk-away option at the contract’s end, be aware of turn-in conditions and maintenance stipulations.

Next in this series: Full-service leasing on the rise?

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