If you’re looking to purchase a semi-truck, there are many different commercial truck financing options available. As purchasing a truck is such a major investment, it’s essential that you understand the details of each financing option in order to choose a commercial truck loan that is best for your requirements.
To do this, you’ll need to understand the different semi-truck financing terms laid out in your agreement. You’ll also need to choose an agreement that offers your business the best long-term value.
In this guide, we’ll break down the different terms and types of financing agreements you’ll come across. Understanding this is essential before deciding on a commercial truck financing solution.
Semi Truck Financing Terms
When looking at a commercial truck financing agreement, there are certain terms that operators need to understand and adhere to. Here is a breakdown of the important terms you’ll find in agreements for semi-truck loans.
Hire Purchase
Hire purchase is a type of commercial truck leasing agreement, where you essentially rent out the truck until you have paid it off. In these agreements, ownership is transferred to the operator at the end of the commercial truck loan contract.
In a hire purchase agreement, you will typically finance a semi-truck over the course of around three to five years. First, a down payment will be paid (usually around 10% of the price), and then regular payments are made to cover the total cost of the truck.
These monthly payments include interest and fees. Once all payments have been made, truck ownership is moved from the supplier.
Some suppliers allow for a balloon payment at the end of the hire purchase agreement. This is when a larger final payment is made to reduce the monthly payments.
Hire purchase agreements are different from a traditional semi truck loan, as you don’t actually own the truck for the years you pay off the vehicle.
Contract Purchase
Contract purchase agreements are another type of commercial truck financing option similar to hire purchase. In these types of commercial truck loans, repayments cover the depreciation of the vehicle during the contract period, and not just the vehicle’s entire cost.
At the start of these commercial truck leasing contracts, the supplier establishes an estimate of the truck’s residual value. The operator makes a down payment and monthly payments. When the contract period is over, operators can make a final balloon payment to buy the truck, or they can return the truck to the supplier.
This approach to commercial truck financing is useful because there is more flexibility at the end of the contract. If the truck’s actual market value is greater than the final balloon payment, you will likely choose to pay this and own the vehicle. If the balloon payment is greater than the market value of the truck, you can simply return the vehicle.
Finance Lease
A finance lease is one of the more popular semi-truck financing options. In these agreements, the operator never actually takes on ownership of the vehicle. However, they can sell the truck to a third party at the end of the term, and keep the vast majority of the sale price.
Finance leases work by paying regular rental payments on the semi-truck that covers the truck’s value. If operators do not sell the vehicle at the end of the term, they can also choose to continue renting the commercial truck at a reduced price.
Operating Lease
Operating leases are a type of commercial vehicle loan where the truck’s residual value is factored in. The lease period for these is significantly shorter than the truck’s life, and the operator pays for the depreciation during that period, as well as the finance costs. The operator does not pay for the entire cost of the vehicle.
The semi-truck supplier sells the vehicle to a third party at the end of the lease term, which is how they recover the difference in costs. The downside of this is that the operator does not gain an asset at the end of the operating lease agreement.
Contract Hire
Contract hire agreements are very similar to operating lease agreements, except they include a maintenance and repair contract. In these agreements, the operator gets a more inclusive deal, with fleet management services often included. Hire periods on these agreements generally run for 12 to 60 months.
Annual Percentage Rate (APR)
The annual percentage rate (APR) is the total cost of the semi-truck loan calculated as a yearly rate. This includes all fees and interest.
The APR takes the compounding interest of each month into consideration, which means the APR will be greater than the nominal annual rate of interest. It’s important that operators understand the APR so that they can compare rates and make more informed decisions.
Flat Rate
While the APR displays the interest charged on outstanding debt, the flat rate is charged on the original amount borrowed. This means a flat rate in commercial fleet financing does not take into consideration how much of the debt has been repaid.
Off-Balance Sheet Finance
When looking at semi-truck financing, it’s important to understand off-sheet balances. This term covers contract hire and operating leases, where the commercial vehicles never appear on the operator’s balance sheet as an asset (because they don’t own the semi-truck).
This means there are no debts for the commercial vehicles listed under the balance sheet’s liabilities.
Off-balance sheet financing options help make the company’s debt-to-equity ratio look better, which makes the company’s financial position look stronger. The opposite of this is on-balance sheet finance.
Capital Allowances
Capital allowances let companies write off the costs of their taxable assets (their commercial truck fleet) against their taxable income. It’s important to understand what capital allowances and limits apply to your business when choosing a semi-truck financing solution.
Credit Score
Your credit score is an important factor in determining what semi-truck financing options are available to you, and what kind of interest rates you will pay. Bad credit doesn’t mean you won’t be able to access truck financing, but it can affect what semi-truck financing options are available.
While credit score requirements vary by lender, you will typically need a credit score of around 600 or more for the lender to offer semi-truck financing. The higher your credit score, the lower your interest rate and down payment could be.
Some lenders, like Mission Financial Services, do not take your credit score into consideration. Commercial truck financing also takes other factors into account: how long you’ve held a commercial driver’s license, your driving history, your revenue stream, and more.
Loan Terms
In semi-truck financing, loan terms are based on the specific lender’s policies.
Commercial truck loan terms will typically lie between 12 to 84 months. The specific term length and details are established by the lender based on the type of vehicle, your profile, and more.
Should You Purchase Or Lease a Semi Truck?
Buying or leasing a semi-truck is a big decision when comparing commercial truck financing options. Both have their pros and cons.
The obvious advantage of buying a semi-truck is that you end up with an asset, which holds value for your business. You can sell the semi-truck at a later stage and reclaim some of your costs. Insurance on a semi-truck you’ve purchased is also typically lower.
Leasing a semi-truck is often more accessible for many businesses. There is also a lower risk associated with leasing the truck. However, leasing payments can often work out to be more expensive than if you purchased the truck, and you don’t end up with an asset.
Buying a semi-truck is generally considered the smarter long-term financial investment. Although, it comes down to what kind of commercial truck loan you can access and how this aligns with your business requirements.
Final Thoughts
The right semi-truck financing agreement will make a major difference to your business performance and bottom line. This will most likely be your business’s largest asset and investment, so choosing an agreement with the right terms is essential when you finance a semi-truck.
Always understand the full details of your commercial fleet financing agreements, and use this to compare your options. This will help you end up with a commercial truck agreement that offers the most value, and makes the most sense, for your business.
Semi-truck financing terms can be tricky, but Mission Financial Services aims to make the financing process simple. Contact us today to find out how we can help you!