The situation: A younger owner-operator has been trying to better manage his cash flow and to dig his way out of high-interest credit card debt. He was having trouble prioritizing his bills after paying himself, and at the end of the fourth quarter he had enough cash on hand to either pay off his truck or to pay his estimated quarterly tax payment. He didn’t know what to do with the money -- relieve himself of the monthly truck payments (and help his cash flow situation) or pay his estimated taxes.
Gary’s fix: I talked through this situation with this owner-operator, but at the end of the day, it’s really a no-brainer: Pay the taxes, and there’s a few reasons why.
First, you could be subject to a penalty and accrued interest for not paying quarterly taxes. It’s not automatic, but it’s a toss-up and something to consider.
Secondly, if there was a hiccup in business in the early part of this year, you don’t want to be left hanging without the cash on hand to pay the IRS.
Lastly, there’s not much to gain at this point in the term of the loan in paying the truck off early. As with home mortgages, the bulk of the interest on truck loans is paid in early parts of the loan cycle. So if you’re considering trying to pay extra on a truck loan, do it early in the loan because that’s the easiest way to cut interest paid over the life of the loan.
When you get a truck loan, consider the payment schedule as a key aspect of your overall cash flow management. Extra payments early are the ones that really help you. Later, when less of your payment goes to interest, it might make more sense to use any available funds in other ways, such as padding your emergency savings, starting a maintenance and repairs fund, putting money in a retirement account, or paying off other debts.
When I advise operators on truck loans, I often recommend opting for a loan with smaller payments. That gives you more cash flow flexibility and helps you keep profitability top of mind when making load decisions. You can always pay extra on truck loans, but a big fixed payment can drive bad decisions on load choices, cause stress, and diminish your home time.
As for the owner-operator debating paying taxes versus paying off his truck, he said it was a big relief after he paid the taxes, especially when he had only a few more months to pay on the truck anyway.