Do you know for certain what interest rate you are paying on your truck loan? Try pulling out your truck loan document to check. Can you find the interest rate percentage? Your truck is the greatest expense your business encounters, so all costs associated with acquiring that truck should be fully understood.
Since most owner-operators must finance their equipment, knowing the interest rate is paramount. Trucks are not cheap and the cost associated with financing your equipment has a huge impact on the bottom line. The interest rate is probably the most obvious thing that comes to mind when we think about the costs associated with financing. After all, the interest rate is the amount the borrower pays the lender for the use of the money.
It stands to reason then, that a lower rate equates to a lower payment, which ultimately translates to more profit for your business. Consider this, a $100,000 loan amount at 8.75 percent APR yields a monthly payment of $2,063.72 for 60 months. That same example at 10.75 percent APR yields a monthly payment of $2,161.80 for 60 months. That two-percent difference in the interest rate will cost you nearly $100 more per month, or almost $6,000 over the life of the loan.
As you can see from the above example, securing the best possible interest rate should be a priority. Unlike a lot of expenses owner-operators face, you normally have no control over your truck payment once you sign the loan documents. Expenses such as fuel, meals and insurance are not usually fixed, so you can make adjustments, which can improve your profitability. Truck payments on the other hand are normally fixed, so you'll live with the deal you make today.
Shopping for the best possible interest rate should always be a part of the buying process. Unfortunately this is not always easy. Most owner-operators do not have direct access to equipment financing. Most equipment financing is arranged by the selling dealer, which obviously limits your choices.
When shopping for a finance deal, compare rates. Sounds easy, right? Well it is, but you must be specific when requesting interest rate information. Be sure your lender or dealer quotes your rate as an annual percentage rate (APR). The APR is the cost of your credit expressed as a yearly rate and this will allow you a consistent means of comparing rates and programs.
Ever heard the saying "what's in a word?" Believe it or not, the word "rate" can mean different things to different people. When you receive a rate quote, be sure to ask if is expressed as an APR.
Some lenders and sellers actually quote add-on rates. Say what? A rate is a rate, right? Actually no, 9.00 percent APR and 9.00 percent add-on aren't even in the same neighborhood. A 9.00 percent rate sounds great, right? Well if it's 9.00 percent APR, I would agree, but it might be 9.00 percent add-on, which equates to nearly 16.00 percent APR on a 60 month loan. Be sure everyone is on the same page, you may be thinking APR, but the lender or seller may be thinking add-on rate.
The difference between 9.00 percent APR and 16.00 percent APR on a loan amount of $100,000 with a term of 60 months would cost you an extra $21,000 in interest charges. I believe most rates are expressed as an APR, but I have learned there is at least one lender quoting add-on and that's one too many. Let's hope this practice is isolated, but be prepared to address this issue if your rate sounds too good to be true.
Years ago add-on was the norm and Uncle Sam was so concerned about this that we now have federal laws in this country that require consumer lenders and sellers to disclose and quote rates as an APR. Unfortunately, these laws only govern consumer lending. I guess Uncle Sam didn't see the need to apply the same standard to commercial lending. Transportation equipment, such as over-the-road trucks and semi trailers are commercial vehicles and are not generally used for personal, family or household purposes, so they are not governed by consumer lending regulations.
This is particularly important, because if you allow the dealer to arrange your financing, the APR will most likely not be disclosed on the loan document. Most dealer arranged transactions will be documented on a "Conditional Sales Contract" and the cost of your financing will be disclosed as a whole dollar amount and labeled as the "Finance Charge." Stare at that contract as long as you like, but you won't find the APR. That's why it's imperative you know all the terms prior to signing the loan documents.
Your best defense against paying a higher rate is a good offense. Be proactive and demand that the lender or seller disclose all the loan details before the loan is documented. Once you have the APR, amount financed, monthly payment and the number of payments, do some investigating. If you don't have the ability to verify the lenders calculations, have a disinterested third party assist you. If all else fails, request an amortization schedule from the lender or dealer.
Better yet, avoid all this and call OOIDA and check out our trucker friendly finance program! We offer owner-operators the ability to secure competitive financing on their own. Not only do we quote APR, we also disclose it on our loan document. Before you commit to a finance package, get a quote from OOIDA. It won't cost you anything and it just might save you some of your hard-earned money. LL