Becoming an Owner-Operator: Financing Your First Truck
So you have decided to take the next step forward in your trucking career and become an owner-operator, congratulations! One of the first things you may be thinking about is how to go about getting your own truck. This can be both exciting and intimidating. You should take your time to find the right make, model, and specs to fit your needs, but also determine the right way to pay for it. It is essential to find a truck that fits your needs right now, even if it doesn’t have all of your wants. Staying within your budget at this stage is key to your long-term success.
Should I Buy a Truck or Lease?
There are two main options to consider: purchase or lease. Within purchasing, you can buy your truck outright or secure a loan. Within leasing, you can lease through a third-party or lease-to-own with a carrier. There are benefits and drawbacks with each option, and your choice will depend entirely on your situation and goals. So, let’s compare to see which one is a good fit for you.
Purchasing a Truck Outright
Purchasing your own truck, from a purely financial perspective, is a great way to go. Comparable to buying a home, you are building equity faster than leasing. You either own your truck outright from the get-go or you own it after the payments have been completed. And now you can use that equity to trade in for a new truck whenever you are ready to do so. There are also tax advantages such as depreciation write-offs and adjustments.
Given the cost of either new or used trucks, you will need substantial funds to buy a truck outright. If you have the capital, there are certainly benefits to utilizing this option. For example, you will not be taking on any debt and you will not have to make any interest payments. This helps build your long-term savings and eases your monthly cash flow. Although avoiding debt and interest makes sense in many situations, there are times when you are better off keeping the funds available for other expenses, so look at your overall financial picture before making a large truck purchase.
When purchasing a truck you also want to consider the age and mechanical fitness of the truck. Some companies only allow trucks of a certain age in their fleet. You could be limiting your options by choosing an older model, even it if is more affordable.
Purchasing a Truck with Financing
Taking out a truck loan eases the upfront financial burden of purchasing a truck, but still builds equity and ultimately ends with truck ownership. Should you go this route, a lender will typically require good credit and a down payment of 10-15% of the purchase price of a new truck, and up to 20-25% the price of a used truck. Although the overall cost of the truck typically ends up higher than if you bought outright, the monthly payments are more manageable and allow you to better handle unforeseen expenses like repairs or rising gas prices.
Leasing a Truck
Leasing is a great way to get into a truck for those who have little money to put down, are having difficulty qualifying for a loan, or are looking for smaller monthly payments. In addition, lease terms are often more flexible when compared to truck loans and the periods are typically 36-48 months. However, one thing to consider is that you can only write off the lease payment; there is no depreciation write-off available.
While conventional truck leases may be available, lease-to-own options are much more common. Comparable to renting an apartment, with a conventional lease you are paying to use the truck but not building any equity ownership. You return the truck at the end of the leasing period and walk away without further obligation (pending all terms have been met). A lease-to-own lease will often look similar to a conventional lease, but will include a negotiated buy-out price at the end of the lease period and then you will own the truck outright.
Leasing to Own with a Carrier
Another option is leasing-to-own with a carrier, which is exactly what it sounds like. You will make monthly payments to the company you work for and part of that payment will go towards the truck’s purchase price. At the end of the lease term, there may be a larger, final payment you will have to make and then the truck is yours, or they may roll that equity over into a newer truck lease. This lease-to-own program blends the advantages of leasing and purchasing, and serves as a way for truckers with credit issues or those without money for a down payment to work toward ownership. It is comparable to purchasing a house contract-for-deed.
With either lease-to-own option you are still building equity, just not as quickly as if you had purchased a truck.
A Warning About Leasing
A word of warning, do your research on the company and the equipment, and also be honest about your capabilities as an owner operator. Not all leasing companies or carrier leasing programs are created equal; some are designed only to make the company money without ever allowing you the margin you need to get ahead. There are certainly companies looking to take advantage of new or naive owner operators through carrier lease-to-own programs.
While we have discussed an overview of general lease options, there are many nuanced leases available to owner-operators and we discuss them more in our in-depth article about leasing a truck.
Whether you are leasing or purchasing, it is essential to make sure you understand all the terms of the agreement before you sign anything. And if you need help, hire a professional to read and explain it to you. Better to pay someone to advise you now than to end up paying huge penalties later.
The best advice is to connect with a financing company or carrier who cares enough about you to do what’s best for you and wants to make you successful. It is extremely important to look at this process as relationship building and to be aware of predatory companies looking to take advantage of you. Do your research, compare lenders and their terms, and really get to know who you will be going into business with. If you find yourself with only one option - and that option is not great - maybe you should reconsider purchasing a truck at this time.
At the end of the day, your truck is your primary asset and it is crucial to take the time to determine the best way to finance it based on your own personal situation. Look at all your options and weigh the pros/cons of each before making a decision. Getting in your own truck is an exciting and important step toward making your goal of becoming a successful owner-operator a reality.
Do you want to learn more about what it is like to own with K & J Trucking? Watch Dan's Story!