Used Trucks ~ Cash vs. Financing

I was under the impression that if you don't have more than 1 year as a CDL holder, getting your own authority won't help much because the insurance is still going to be really hard to find. Seems like leasing onto a company for the first year would be best up front and I've seen companies that pay 85% of the load AND pay for most of the insurance costs.

 

A truck paid in full will always be the best route. In good times, what's few $$ going to the bank / lenders but in lean times you'll be sore pressed and will feel the crunch. All the same, I wouldn't get anything too old or high mileage. Wouldn't want to spend more than what the truck is worth to bring it up to spec.

 

IF I were to do it (not that I can). Buy it now! To go through an account to buy it off over time is asking for more trouble than you realize. Lets say you did. What happens if that said bank / institution sells your account off to another company, that company has the right to ask you to come up with payment immediately or to change how you pay. So while you may have had a deal to finance and have some escrow account offset the difference and bring in a few dollars, this other company can change it becuase "thats business".

You buy it is yours. Plain and simple. You can write off the value of your truck over 10 years if you want (my tax man did it for my stuff). Keep track of your expenses and ITEMIZE. IRS loves itemized returns. Just remember, anything less than $15,000 per year income becomes a hobby in 3 years. If you dont make a profit over that 15k you cant itemize.

If you dont own, insurance will be higher than if you own. The reason is this. You dont own, you will think to yourself, so what if it gets destroyed, its insured. If you own, you will be more concerned about everything, including that JB Hunt (or any company) that is burning his clutch trying to put the 53' trailer into a hole at the end of his 11 hours. We have all seen it, if you havent, you will soon enough. You own, you will pay more attention to your equipment and insurance companies recognize this.

Not all companies will you need to lease on with. The broker I am looking at for work, will give only the DOT# and loads. The rest is my problem. He had a load where he sent 4 empty trucks to Florida to get equipment for a job near Belfast. Each truck was to carry 18000# of building materials for a specific job. The pay is 12 grand per truck. 1500 miles each way. Too bad I dont have a truck.

 

I have five trucks and a trailer right now. Four trucks and a trailer are paid for. I financed everything with zero down. Provided your credit is good, I wouldn't put down more than I had to or nothing at all. If you can lease, that's good too because you can write the entire payment off each month for the whole term of the lease. If you buy, you have three years to write your truck off. Always keep as much of your money in the bank for repairs, tires, towing, etc... Don't tie your money up in a downpayment. In my opinion its also better to finance vs. paying up front. You write the yearly interest off that you paid as well. You need write offs. The main thing is to make sure you are comfortable with your monthly truck payment and have some payments on the side in the event you fall short due to illness.

 

Ok, I am an accountant (hence the screen name). I have a client who has a small trucking operation. IMO, NEVER!!! finance a truck or trailer if you can avoid it. Now lambchop says you can write off the lease, which is true, but lets look at this from a different angle. My client currently shells out $2k a month for his lease. So, if you instead pay cash for your truck (providing that you can) you can then take that $2k and put more into your own pocket (which payroll expense or contract labor is still tax deductible) and still have cash you can save up in your business should you have a break-down.

90% of the businesses I've seen go under (trucking or not) have had big problems with cash flow, which caused thier demise. As mentioned earlier, keep the over-head as low as possible, that way when the skinny times hit, you have the wiggle room in you budget to adjust to them and stay alive.

 

i my self look at it this way,say the person is in a possition to buy with cash,tax time if you keep all your recepts for showers,scales ,maint, tires. pretty much while your out anything you spend money on from food to the pens you need for your log book are all deductions,,,so if at all possible with the economy the way it is not haveing that $1300 an mth truck payment and a trailer payment on top plus $800 plus a month fir insuranse,it would be smart to keep you overhead as low as possible,,if one was a o/o with his own auth,that $1300 plus say $500 for a trailera mth an $800 there $2300 a mth you could bank,,,,and like most of us fuel can eat you proffits right up and when rates are not up to par or a major repair comes up,,that 2300 thats been saved could save the day in many differnt ways,,,,,,,,,,,,like i was taught in my old profession ,,,,low cost high production wins the race and you make money,,,,,,this is just my opinion,everyone has there own way and reasons for why they do it that way,,,,,i look at it this way it dont have to be big and shinny ,to make money ,,the trick to this is ,,self maint,maint ,maint,,if it needs oil feed it, if it needs grease grease it,,,its mechanical folks ,you can work it hard,but you have to take care of it to last,,,,,so in all reality if your a buisness owner of a truck and run that truck,you need to know how to maint that truck,,,cause not getting a litle dirty in gona cut inot your bottom line and grease is cheap along with a bar of soap

 

Wow! So many different opinions on this subject. I look at it like this. If I purchase a truck and trailer for say 150K and finance it, by the time I get it paid off at the bank I have actually paid close to 225k for it. Theres 75k I could have banked. Sure the interest can be wrote off on taxes, but it's going to be know where near 75k. The bank is going to make there money, and the government is not going to give it back to you. The bank is paying taxes on the money they made off you and a portion of that is whats given back to you when you file taxes on the interest you paid. So the bank and government has made money off you.
I think the big key is knowing what situation your in. If you can buy cash AND you have enough left for operations then thats your way to optimize your profit. Keep in mind that you can also write off a purchase on your taxes, 150K purchase is a good start on writing things off. However if you don't have the money for cash purchase & operational cost saved up, then financing would be the way to go. If I was going to finance then I would plan on trying to pay that loan off ASAP by running a few extra loads when you can. The bottom line is barrowing money cost you more money.

Yes I know 75K is one hell of an interest rate over 5 yrs for 150k loan. But everything else stands the same: The bank is making money off you, and the government is not giving it back to you. So all in all your losing money off your bottom line.

 

Exactly, PG. Limit that to just the govt and you can keep the banks portion. Plus people don't realize how little that interest expense lowers your taxes. According to your example, 75000 over 5 yrs, thats 15000 per year. So, if you're in the 25% tax bracket, thats 25% of 15000 = 3750. You can't convince me that spending 15000 in interest is worth the 3750 in tax savings no matter how hard you try.

 

This really isn't true for the trucking business. Although this a highly regulated and taxed industry, providing quite a complex of paperwork to figure, there are also terrific tax deductions for the owner-operator, such that when combined in a married filing-joint, the owner operator can expect to recover tax monies paid by the spouse at her/his job. Almost everything becomes an expense, including HUT, IFTA, and whatever loan principal and interest one owes for truck, trailer, APU, laptop, etc. The taxes on business means expensing out whatever contributes to your business, which is a good part of your lifestyle, especially while on the road. From the comparatively huge broker paid receipts, fuel and maintence easily take the lion's share of the paycheck, followed by registration and taxes, and finally one derives a small and modest living, ideally one that is nevertheless double the company driver take-home pay or better, for all the responsibilities that OOs have with their authority.

Having said this, buying a used truck is really the better option for most owner-operators for number of reasons--even for those OO who are well capitalized.

First, the first and second year depreciation on the tractor and trailer dwarfs the same sort of thing found in a personal auto or RV. Used purchases avoid this real capital value loss.

Second, since truck warranties typically last until 500,000 miles, and since many fleets purchase additional warranty coverage, careful VIN background check and purchase of a vehicle still under warranty provides an opportunity for like new purchase. Make sure there's still 50,000 or so miles and adequate time left on the transferrable warranty to appraise whatever is wrong during initial use. If you have a local friendly mechanic study the engine, you may find an opportunity to justify huge dealer warranty work--replacing cams, rod bearings, etc.--to make a like new engine. Understand that during the current recession franchise dealers have struggled to make ends meet too, trying to keep skilled mechanics workings, so they are willing to figure out a way to justify billing the corporate company for labor, even as they get basically free factory parts.

Third, since fleets are having to downsize during the recession while they also upgrade earlier than usual to meet CARB requirements, while OOs have a two year or later delay on CARB. So, there is some pretty good used equipment idle on the sales lots, forcing prices dramatically downward. Just don't buy anything older than a 2004 because according to CARB website, older vehicles will be phased out as early as this year. Next year, all vehicles will have to be "registered" just as TRU registers reefer engines now, making it harder to evade CARB. Understanding and complying with CARB is most important for haulers of reefers, since on average CA to NY loads are the highest paying lanes in the business. OOs who don't meet CARB reduce the most lucrative loads. Naturally, whatever fuel or engine maintenance is required must be passed on to the customer, and the brokers are well aware of this reality in the marketplace.

Fourth, while extra CARB low interest rate loans and grants, plus the ease of being fully compliant, might recommend a new vehicle purchase, there are nevertheless ongoing engineering development issues that OOs really don't want to beta-test.

Incidentally, contrary to popular belief, ECM and CARB emission equipment is designed to improve engine life and fuel economy (without loss of power), and will live longer than old equipment before major breakdown. DO NOT become nostalgic about old engines, heavy chrome ornamentation, and so on. The truck business and engineering of equipment is all about light weight rust free parts and designs for a specific lifespan of use--about one million miles or more--before the entire vehicle is replaced with a more advanced model. Getting nostalgic about trucks in this day and age is no more sensible than nostalgia about old computers or cell phones. Some old Peterbuilts are worth retrofitting toward CARB, but this will take a lot of extra work--both at the mechanics shop and when dealing with the government bureaucracy, and even then don't expect performance to match the new technology airflow designed trucks.

We are in a period of engineering advancement when, after years of wasted delay, manufacturers are suddenly competing to design the best engine for the new global warming age. It's the environment stupid! Nobody wants to breathe smokestack crap drifting off the interstate highway into their living room. Old timers who insist on idling their engines at night live shorter lives and kill their engine. So, this awkward period means new behavior where big fleets are forced by government regulation to buy new expensive and untested technology, equipment that's likely to be problematic in practice, at least at first. Big fleets can afford this, so it's OK, and we will all breathe easier for it. OOs, who simply can't afford to leave a truck in the shop for very long, though are more sensible to take a wait and see approach, to wait for the vehicles retrofit improvements and recalls to be made by the fleets, before buying used at just under 500,000. Just avoid broken and rusty looking equipment which begs the scale master to do an inspection.

In my own case, I have a 2006 Volvo with a Cummins ISX motor, which I bought for $50,000 last year. The engine had $12,000 in warranty repairs within 3 months after I bought it--which was great for me--but I've had to replace of the EGR valve. I stay on top of all repairs, naturally, and expect to replace the tractor or its motor in 2014 or 2015, probably with a 2011 or 2012 model used vehicle. My 2002 reefer trailer came with ABS brakes, new brake shoes and drums, and a new Thermo King engine and compressor. It is even more forgiving and reliable than the tractor, so I can't really see much benefit in buying a new trailer. So, I've got the latest technology I could justify for a cash purchase and government requirements, and I plan to wait out until this period of emissions equipment becomes more reliable in practice. My older vehicle needs more routine attention, as something is always in need of repair, but rarely more than a portion of the monthly payment on a new truck (and even the new truck will require additional investment in tires, oil, etc).

Fifth, OOs need to not finance to closely. Keep the balance sheet easy and in your favor. If you become sick, burn-out and wanting of a vacation, or whatever may take you away from your work, you certainly don't want payments strangling your lifestyle or putting your credit in jeopardy. Pay for your rig in cash, or get very low monthly payments, so that you can afford to let equipment sit weeks or even a month or more without becoming a impossible financial burden on your mind. While your house is an investment, your truck is not, so don't let it sit too long though.

Sixth, if you don't like driving anymore, for whatever reason, selling a used truck cheap is less a financial hazard and money loser than selling a new truck cheap.

Any arguments to the contrary?

 

Here is an easy scenario

Say you have interest payments that add up to $10,000
If you did not have these payments you would pay Uncle Sam $3,000
This would leave an additional $7,000 in your pocket

(This was calculated using a 30% tax rate)

Now why in the world would you send a bank 10k to keep from sending the government 3k?