Unfortunately, some finance brokers / finance companies quote unrealistic or false interest rates to customers in an attempt to make a finance proposal look more attractive than what it actually is.
Interest rate is not the biggest influence on monthly payments relating to truck and heavy equipment finance. It is for this reason, that customers should look at what the actual payment is on their loan contract as opposed to focusing too much on the interest rate.
Effect of Interest rate on monthly payments
|Interest Rate||Finance Amount||Term||Balloon||Payments (in arrears)|
|Rate – 4.95%||100,000||60||30%||$1,464 per month|
|Rate – 5.45%||100,000||60||30%||$1,493 per month|
|Rate – 6.25%||100,000||60||30%||$1,539 per month|
|Rate – 7.45%||100,000||60||30%||$1,609 per month|
|Rate – 8.46%||100,000||60||30%||$1,668 per month|
As can been seen from the above table, even after a risk premium has been applied to the base rate, a spread on rate between 4.95% and 8.46% does not hugely affect the total monthly payment.
|Interest Rate||Finance Amount||Term||Balloon||Payments (in advance and with the gst deposit into the loan in the 4th month)|
|Rate – 4.95%||100,000||60||30%||$1,249 per month|
|Rate – 5.45%||100,000||60||30%||$1,275 per month|
|Rate – 6.25%||100,000||60||30%||$1,316 per month|
|Rate – 7.45%||100,000||60||30%||$1,378 per month|
|Rate – 8.46%||100,000||60||30%||$1,431 per month|
If a comparison between table one and table two is made, it can be seen that monthly payments on equipment finance are driven mostly by structural changes to the loan as opposed to the interest rate.
Some clients focus solely on interest rate instead of looking at what the monthly payments are. Table two indicates, that structural changes to a loan contract are effectively what saves money over the term of the loan.
What factors contribute to risk premium?
The current base rates with Heavy Equipment Finance are 4.95%, however a risk premium may be applied at the discretion of our Credit Manager if any of the following conditions apply.
- New start venture
- Goods being financed are greater than 5 years old
- Marginal servicing of the proposed loan facility (i.e. cash flow lend)
- Private sales
- Specialised goods
- Adverse credit score
- Asset backing of the applicant
- Time in business of the applicant
How does rate change for different type of lending?
Unlike home loan lending and car finance, there is more risk for a lender when it comes to equipment finance. For instance, a bricks and mortar property is less likely to reduce in value over time as opposed to the value of a truck, of which is quite likely to decrease in value over time. This being the case, it is expected that rates paid on a home loan would be lower than that paid on an equipment finance loan – due to the increased risk of the asset.
Moreover, with car finance if a car was to be repossessed by a financial institution and sent to auction, there would likely be many buyers looking to bid on the vehicle – therefore recovering the cost of the vehicle to payout the loan is more achievable. On the other hand, if a truck was to be repossessed and sent to auction, there would likely be less buyers looking to bid – therefore recovering the cost of the truck to payout the loan is less likely. As this is the case, it expected that rates paid on a truck or heavy equipment finance would be higher than what is paid on a motor vehicle.
How does interest rate affect tax deductibility?
On most equipment loans, a client can claim the full gst on their next business activity statement and depreciation and interest as a tax deduction – with the exception of a lease whereby the finance company claims the gst and the client claims the full payment as a tax deduction.
This being said, any interest paid by the client is claimed as a tax deduction on their profit and loss and reduces the overall tax paid at the end of the financial year.
Unrealistic interest rates
Some dealers advertise interest rates from 0% to 1.9% – however buyer beware. Let’s face it, if it sounds too good to be true it probably is too good to be true. It does not make any commercial sense for any business to get a 0% to 1.9% return on their investment. For instance, the return on investment simply by putting funds in an interest bearing term deposit with any Australian Bank would yield a higher return.
These dealers put in the following approval conditions and clauses in order to make the deal commercially viable for their business;
- Upfront deposit
- Maximum loan term of 48 months
- No balloon payment
- Offer restricted to selected makes and models
- Price of the machine is often inflated (client should compare the price of the same machine with other dealers)
- Extended warranty is built into the finance package
- Insurance is built into the finance package
When these additional conditions and clauses are factored into the structure of the loan, the effective rate (or comparison rate) paid by the client is brought back to rates advertised by most reputable equipment finance companies.
The team at Heavy Vehicle Finance are specialists in truck finance and heavy equipment finance and are wise to all of the tricks played by those advertising unrealistic interest offerings. As this is the case, we are able to advise customers as to whether or not they are getting a good deal or not.
If you want no nonsense advice relating to loans for truck and heavy equipment finance, please contact us on 1300 788 740 to discuss a particular funding scenario.