Truck Finance – Why Would I Choose “Rent to Buy”
Written by: Phillip Gruppelaar
The simple truth, is that in 95% of cases it chooses you.
The good news is that “Rent to Buy” provides a “Golden Opportunity” for the person or business that wants to be a permanent fixture in the Trucking Industry.
“Rent to Buy” gets you into the industry, when others do not want to help.
First things first, what is “Rent to Buy”?
Don’t be confused by the name, you make payments like any other finance agreement and you get an opportunity to own the truck should you wish.
You have an added benefit in that, after one year you have more options than a standard finance contract.
1. You only owe 60% of the original purchase price, armed with your good payment history and financial information on your business, you may now get approved in the main stream.
2. If you want out of the business, you can hand the vehicle back.
3. If you want to upgrade your vehicle, you can trade it in, or hand it back dependent on what you are offered as a trade in (e.g. if the payout is $40,000, if you are offered $50,000 trade in, you get $10,000. If you are offered $30,000 as a trade in, you can hand it back without paying the $10,000 shortfall).
So, why does “Rent to Buy” choose me?
It is common knowledge that Truck Finance for a new business, is substantially harder to organise than a home loan or a car loan.
Financiers have a long history of truck financing failures. This means they demand a range of issues are solved prior to issuing any approval, which include:
1. Proven Credit History (Previous well conducted finance)
2. Deposit to reduce loss exposure risk
3. Industry Experience (Actual Driving Experience and a knowledge of the industry)
4. Fallback Position (cash or ability to raise cash in case of unforeseen problems)
5. Asset Backing (Owning Property is valued highly, it’s not used as security)
6. Proof of good profitability (Many financiers do not accept future contracts, i.e. money you expect to make with this truck)
If you have a bad credit history, “Rent to Buy” may be the only option.
Very good owner driver contracts come along on a regular basis, the problem is the “mainstream” see new ventures as to risky.
To make the mainstream as a new venture you need money, most don’t have it. You can get started with minimal outlay with “Rent to Buy”.
If you genuinely want to be in the Trucking industry, and you are having difficulty getting the finance you need.
A long term view of your future is required, not just the first 12 months.
In the example later you will see that your payments will be high for the first year. Roughly double what you will pay to a second tier lender, but from there they are potentially substantially better.
Question 1. Should I really be going into business if I can’t afford this payment (on a $70,000 finance agreement, approximately $400 per week more) Remember this is only for one year. Is it worth $400 per week to get into the career of your choice?
Question 2. If the payments are too high, can I have a lesser vehicle for the first 12 months? Remember you will only owe approx. 60% of the original price. You can trade in or hand back.
Question 3. Have you planned and budgeted correctly? Remember this is a “Golden Opportunity” Get your budget right. Most new ventures fail due to poor planning.
If you have done your homework, and you can afford to do this, let’s compare “Rent to Buy” with a typical second tier lender, considering the total cost of ownership.
Second Tier lenders are similar to the mainstream, but take more risks. You pay a higher interest rate over the term of the loan to mitigate the risk they foresee.
|Second Tier Lender||Rent to Buy|
|Truck Finance Amount:||$70,000||$70,000|
|Loan Term:||5 years||1 year|
|Amount Owed After 12 Months:||$60,730 Principal||$42,000 Principal|
|Approx. Weekly Payment:||$420||$817|
|Approx. First Payment & Fees:||$2220 (1st payment & Application Fee)||$4481 (1st Payment Application Fee & 4 weeks bond)|
|What happens after one year?||Continue with Second Tier Lender
Payments 4 years @ $420pw = $87,360
|Switch to Mainstream
Payments 4 years @ $230pw = $47,840
|Total Cost of Ownership||$109,200||$90,324|
If you can’t get into the mainstream initially, choosing rent to buy, then upgrading to the mainstream (you now have financial information to show you are profitable and you have 12 months good credit history at a far higher payment) is a substantially cheaper option, Financiers do not like refinancing contracts midstream.
Rent to Buy is a finalised contract, Second Tier is refinancing.
Deposit – A second tier lender will want 10-20% deposit or suitable additional security to cover risk (e.g. Truck $70,000, Deposit Range $7,000 to $14,000).
(NB. Second Tier lender payments are monthly, Rent to Buy is weekly, the 4 weeks bond is refundable at end of 12 months).
Taxation: No allowances have been made for Tax Benefits. A second tier lender would normally use a Chattel Mortgage contract. You can deprecate the truck and claim back the interest. For “Rent to Buy” you claim back your payment. You should discuss taxation benefits with your Accountant.
In summary, everyone want to be in the mainstream, primarily because it’s cheaper, therefore you make more money. Unfortunately many who want to be owner drivers, just don’t meet the approval criteria.
“Rent to Buy” has a larger first year payment, but if you can deal with this and you make your payments on time, you can find your way to the mainstream quicker.