With borrowing costs up, use financing relationships, experience to advantage

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Updated Jan 27, 2023

Shomotion fleet owner Mike Scherkenbach has bought four new trucks in recent memory through the Rush Enterprises dealer network with financing through JX Financial, affiliated with JX Truck Centers and with whom Scherkenbach has a relationship going back to his early days buying trucks. "I've been with their financing department for 17 years, and can get approval pretty much instantly," he said. 

In recent history, prior to 2022, interest rates all around were generally at their lowest levels in history for all manner of loans, including truck loans. The reason for that is the Federal Reserve had kept its target federal funds rate near zero in hopes of stimulating the economy in the wake of the early shock of the COVID-19 pandemic.   

Rates have gone up considerably since. Just ask Scherkenbach, who notes on trucks he financed prior to 2022, after a long history buying trucks and building creditworthiness, he was paying "maybe 4%" interest. Now, rates are "up nearly double" that for him. 

A doubling of interest rates from 4%-8% makes sense, given that starting in March of 2022 the Federal Reserve began raising its federal funds target rate, and cumulatively over 2022 subsequent hikes have added 4.25% to the target rate's upper limit, boosting the cost for interbank lending. Those costs flow into commercial and personal loan markets not unlike rising fuel surcharges/costs ultimately hit the price of consumer goods. (The next meeting at which the Federal Reserve will consider further hikes is set for January 31-February 1; Specialty equipment financier Commercial Fleet Financing President Matt Manero noted the Fed has signaled further rate hikes of as much as another three-quarters of a percent are on tap for 2023, with no reversal likely.)

What's a potential extra 4.25% in interest worth over the course of a loan term? Consider a hypothetical posed by ATBS President Todd Amen when queried about the impact of rising borrowing costs for owners among the business services firm's clientele. 

Say an owner-operator with relatively good credit financed $100,000 on a five-year term, common enough for many truck loans, in pre-2022 times at 6% interest.

Total loan amount: $100,000
Monthly payment: $1,933 
Interest paid at full term: $15,997 

An extra 4.25% interest boosts costs for the same loan by, well, much more than 4.25% over the entire term:  

Total loan amount: $100,000
Monthly payment: $2,137 (or +10.6%)
Interest paid at full term: $28,222  (or +76.4%)

CFF's Manero noted there's no question that the fourth quarter of 2022 saw financing applications slow down at CFF. The "cost of money is making the cost of ownership higher," he said. "Our application flow dropped a little in Q4, but the conversations were the most interesting part" about the fourth-quarter experience. "People still want to buy," in many cases, but are skittish about committing when they put current financing terms up against what they were used to with prior loans. "Where’s that extra $800 going to come from?" as Manero put it, summarizing the buyer's central question staring down a monthly payment on a new-truck loan.

Waiting for interest rates to come down, he noted, is not a strategy, given the Fed's signals about further rate hikes this year. "Get dedicated contacts to stabilize revenue," he said. "You've got to find a way to get the best contracts you possibly can."

At once, the intent of hikes in the fed funds rate -- to tamp down inflationary pressures -- may have met its mark and, as at least a partial result, delivered conditions that yield other dividends to potential used-truck buyers in the market today, given declining prices. Not to say there aren't plenty other conditions at play, including declining demand with slowing economic growth, a spot market that lost much of COVID-period gains, and so much more, all of which Manero sees clearly, too.

But looking at it from a high level, it's true that used truck prices "have been falling at the same time interest rates have risen, likely more than enough to offset the increased interest cost," Amen said. "So net net it's probably a neutral" factor for most owners with stability in the business. 

In the months of October and November last year alone, according to ACT Research, the average used-truck sale price lost 2% and another 3%, respectively -- say that $100,000 loan was inked in September. Wait a couple months and it could have been closer to a $95K loan. At a 1.5% interest-rate premium (the amount the fed-funds rate changed over those months) over a September rate, it is indeed more or less a wash -- even a $2,000 or so total savings over the life of the higher-interest-rate, though smaller, loan. (Owner-operators can game out various loan scenarios via a variety of available online loan calculators, like this one at BankRate.com.)    

That's just a hypothetical, though, and in commercial lending for owner-operators and small fleets, so much depends on the individual circumstances of the owner, the piece of equipment, the amount of the down payment, the loan's monthly term and the owner's business itself.

Manero broke down the impact of credit scores and corresponding interest rates in the current environment. A credit borrowers, with credit scores north of 700, are fetching "high 7s to mid 8%" rates. 650-700 B credit borrowers rates in the high 9% range. C and D credit borrowers below those credit score ranges, though, are like as not to see high teen and even above 20% interest, in some instances.

Business longevity plays a part, for sure, too.

When long-established Shomotion owner Scherkenbach first got into business, for instance, "nobody wanted to finance me," he said, speaking to an oft-experienced difficulty for would-be truck owners. "My first trucks ever, in 2001, I paid 12% financing," and "it's gone every which way" over the years.

Owner-operator respondents to recent Overdrive polling illustrated the wide variance in loan interest terms, with loans for new trucks generally coming in at lower rates than used equipment. Asked to name the interest rate on loans for used or new trucks inked since spring this year, the results range from below 5% all the way over 15%. 

There can be real value in shopping around among lenders, particularly if your credit is good, yet as with Scherkenbach, Minnesota-based independent Kelvin Schmidt's experience on a recent purchase well illustrates the contrasting value of a close relationship and long history with a lender. 

He financed his current brand-new-purchased Volvo, a 2018 VNL 860, at a time when the federal-funds rate had risen off post-Great Recession historic lows to around 2%. It was his second-such-financed purchase from the same dealer, with the same lender, and his interest rate on the loan was 9%-10%, he said.

He's taking delivery of a brand-new 2023 model as we speak, though, and even with the rise in interest rates last year, compared to that time, he got a better deal on the rate this time around, at 6%. It came as a result of his negotiation, speaking to the steady nature of his repayment of previous loans, his credit history, and his commitment to the lender extending almost an entire decade back. "I’ve been a client for nine years, never missed a payment, never been late, and never called with any excuses," Schmidt said. 

Kelvin Schmidt's 2018 Volvo VNL 860Schmidt did have to hang on to the 2018 Volvo (pictured) a little longer than he wanted, having exhausted depreciation prior to year 2022. When he ordered the 2023 model, "I wanted it last year," he said, but given pandemic-inspired manufacturing slowdowns he waited a year to ultimately see it built just within the last week.

Ultimately, he got the deal he wanted, regardless of broader interest rate dynamics. --Matt Cole contributed to this report.

[Related: State of freight: Analysts' forecasts pessimistic on big 2023 trucking gains

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