When we advise clients that payments may not differ greatly between financing an older truck as opposed to a newer truck – they are often quite surprised. Below is an example as to why this may be the case.
|Asset Type||Finance Amount||Term||Balloon||Payments|
|2004 Prime Mover||$80,000||3 years||NIL||$2,500 pm|
|2014 Prime Mover||$180,000||5 years||30%||$2,600 pm|
Why do the payments differ by only $100 per month based on the above example?
Age of the truck
A truck that is 10 plus years old is considered a high risk asset. For instance, if a truck that was 10 plus years old, had to be repossessed and sent to auction, the number of buyers looking for an older truck would be reduced. Therefore, the ability to reach a sale price required to payout the loan would be at risk. Also the likelihood of an older truck incurring major mechanical failures and rebuilds is also increased.
Given the increased risk profile of an older truck, the rate applicable on the loan contract is also increased.
Even the though the difference between the two purchases is $100,000 there are other factors at play that ultimately dictate the monthly payment. More importantly, deals over $100K start to get special consideration with respect to a lower interest rate.
If a truck is at the 10 plus years old mark, the maximum truck loan term is 3 years. The effect of paying off the loan in 3 years as opposed to 5 years means that the monthly payment is higher. A truck that is roughly around the 5-7 years old mark at time of purchase, can be paid off over a 5 year term.
No balloon payment can be applied to a truck that is older than 5 years old at time of purchase. When a balloon payment is not part of the loan agreement, the effective monthly payment is increased.
If a balloon payment is applied to a loan contract, the client only pays down the loan amount to what the balloon amount is – i.e. in the above scenario $54,000 ($180,000 X 30%). Then at the end of the term, client can either refinance the balloon and keep the same truck or choose to trade the truck in at a dealer. What the dealer offers for the trade of the truck, will payout the balloon and then customer drives away with a newer truck. The balloon payment assists in reducing the monthly payment and preserves cash low position.
As can be seen in this exercise of payment comparison, the $180,000 prime mover is only $100 per month more expense than financing the $80,000 prime mover.
Hopefully the above information can explain why financing a newer truck may not be significantly more expensive than financing an older truck.
Below are some other implications linking to the finance of an older tuck compared to the finance of a newer truck.
It is harder to source a finance approval when the truck being financed is over 10 years old. Our credit team might also request a deposit into the deal when an older truck is involved. The newer the truck, less likely the need for a deposit. There are more finance options available to clients when financing a newer truck and fewer on an older truck.
Tax Implications GST
GST off set on $80,000 will be $7,272
GST off set on $180,000 will be $16,363
Client will be able to claim higher deductibility on the newer truck in comparison to an older truck. An accounting professional will be able to advise on the methods used to make deductions in their business.
It is more likely (but not guaranteed) that a newer truck will be more reliable than an older truck. A $30,000 engine rebuild is not only a big strain on cash flow, but also downtime on a stricken truck means no or reduced income coming into the business. A new truck will come with new truck warranty, offering clients piece of mind when factoring in repairs and maintenance costs.
If you are looking to see if you are eligible for truck finance of any kind, please contact one of our Finance Consultants on 1300 788 740 for an obligation free assessment of your situation.