November 30, 2018
Q: I’m an owner operator looking to acquire another rig to expand my business. Though the economy seems to be improving, I understand that obtaining a bank loan is a nightmare. How should I best approach financing the new rig?
A: The most important aspect of buying a truck is to first determine how much money you have available for a down payment. The larger the down payment, the easier it is to obtain financing since the lender is taking on less risk by having a smaller loan to value ratio as security. Once you know the amount of your down payment, you can shop the loan. However, we prefer you have the lowest down payment possible. Find out the best interest rate and make sure you’re budgeted for the monthly payment. Following are common financing sources:
- Dealers – Typically the dealer where you are buying the rig will provide financing. Be positive you know the interest rate they are using.
- Banks – Some banks are business oriented and will lend on equipment. Some will not. Check your bank first. If you find your bank is not a business oriented bank, consider changing banks.
- Commercial lending Institutions – Look for companies that cater to the trucking industry.
- The motor carrier – If you are purchasing through a motor carrier, they will usually provide a truck purchase program.
- Credit Unions – Always a source of good financing.
All of the above are good sources for financing a truck. However, you need to shop around, ask questions, and determine the best interest rate available. Remember, it’s possible to negotiate an interest rate lower than what you have been offered.
You should have, at a minimum, a current financial statement, a copy of your last two years tax returns and a business plan.
Q: What is your opinion of leasing the equipment vs buying?
A: If you are purchasing with a large down payment, this usually results in a lower monthly payment. However, if you pay a lower down payment then you will be charged a higher interest rate and will have a higher monthly payment. If always driving a new truck is your preference then leasing is for you. Replacing the equipment you own is more difficult than just obtaining a new lease, but, again, owning may ultimately be more economical.
Q: Should I pay cash for my new rig?
A: The short answer is no. If you are fortunate enough to have the cash available, you should be able to put it to better use elsewhere. You would be investing in an asset that depreciates in value. Not a good idea. We think a minimum down payment is in your best interest, as the government will help you pay the loan by allowing you to deduct the interest, thus resulting in tax savings. Always consult your tax and financial advisor. Also, do a comparison between leasing vs purchasing while considering how often you want to replace the rig. Plan for 5 or 10 years out.
Q: I heard I could borrow from my 401k to help with the down payment. Can I do that?
A: We do not necessarily recommend borrowing from your 401k for financing. Nor should you take an early distribution because you will pay taxes and penalties. Leave the 401k fully invested so the funds can grow while you are working toward your retirement. Also, you should not take a Home Equity Loan. You might get caught paying interest for 15 to 30 years while you may own the truck for 5 years.