Wednesday, November 19, 2014

Fire Truck Trade-in Leases - The Upsides

Last week, we discussed the downsides of a fire truck trade-in lease.  

Also called turn-in or walk-away leases.

The downsides are mostly financial in nature.  Leasing (without ownership) provides financial benefits for a quickly depreciating asset like technology or a car.  But leasing is a mis-financing of a slowly depreciating item like a fire truck.  

Having said that....

Who should use a fire truck trade-in lease?

  • Fire departments who aren't concerned with the financial costs and lack of flexibility of a trade-in lease.
  • Departments who want to force a replacement cycle upon unwilling political leadership.  In other words, if your leaders aren't replacing the trucks timely, a trade-in lease will require replacement at set periods.
  • Departments who are able to maintain the trucks according to the leasing contract.
  •  Departments who are comfortable with a continuous supply of trucks from the same manufacturer.

 

Summary

There are some upsides to using a fire truck trade-in lease.   However, none of them are financial in nature.  If your department fits the above description, a fire truck trade-in lease may be right for you.


Stay safe!
John R. Hill
President
First Bankers

Wednesday, November 12, 2014

Fire Truck Trade-in Leases - The downsides

Fire truck trade-in leases are promoted heavily by fire apparatus manufacturers.  

They are also called turn-in or walk-away leases.

It sounds simple:  Pay payments for a few years while you use the truck, then turn it in for a new apparatus.

However, these leases have very complex terms and are filled with potential downside for the unsuspecting or uneducated department.

So, what are the downsides to these kind of complex leases?

  1. You are responsible for the condition and care of the vehicle.  These type of contracts will spell out in exact detail what you can and can not do with the truck.  It will also obligate you to maintain the truck according to exact specifications.  Failure to meet these obligations will result in extra fees or penalties and perhaps forfeit the right to trade-in the truck.  What this means:  You can't keep the truck according to how you normally keep the truck, you must keep the truck according to the contract.
  2. You will lose any equity in the truck.  These contracts require you to turn over the truck after so many years without any payment due you if the truck is worth more than the balance due.  Since fire trucks are very unique and actually hold their value well, every one of these transactions will result in you giving up any equity in the truck.  You've just rented the truck like you would a Hertz car.  You gain no benefit from ownership of the truck.
  3. You are forced to take action at the end of the contract.  You must do something at the end of the contract. You must turn-in the truck, buy it from the manufacturer, or buy a replacement truck from the same manufacturer.  Each action will involve a lot of money and the decision is forced upon you.

Summary

These leases are touted as being more flexible and cheaper.  But the numbers don't support those claims.

They rarely make financial sense for most fire departments. 

Next week, we'll discuss the upsides of these leases.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, November 5, 2014

The 8 Key Fire Truck Money Questions - #8

The final money question has no hard and fast answers.  And that question is:

Who should I select to finance my new fire truck?

Financing a fire truck is a complex transaction.  It's much more than just borrowing money like you may do for a car or home.

There are many more options - and each option can save or cost you money.  The IRS has very specific rules regarding these transactions - and missing a minor requirement can jeopardize your tax-exempt status. 


So, how can I make the selection process easier?

In a word, expertise.  Fire truck financing has become a specialized practice.  Sure, any bank can loan you money but you may miss some key information or a IRS mistake can be made.  Just as you would choose a medical expert who does something every day rather than someone who does it once or twice a year, selecting a fire truck financing partner involves the same care and attention.

Some benefits you should expect from a fire truck financing specialist:
  • Money saving ideas:  It's more than "what's the 5 or 10 year rate?".  A specialist should learn about your situation and draw upon their knowledge to show you ideas that helps your department.
  • Legal expertise:  A specialist should know the various forms and rules and help you avoid making mistakes that can cost you plenty of money and trouble with the IRS.
  • Fire service customer service:  A specialist will understand how you work and not ask stupid questions.  They should have knowledge to steer you away from non-standard fire truck purchasing requirements.  You should feel like you are doing very little to close your financing.

Summary

Just like you prefer a medical specialist when treating a unique medical condition, you would benefit from selecting a fire truck financing specialist.  You will save money, avoid common mistakes, and have an easier financing experience.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, October 29, 2014

The 8 Key Fire Truck Money Questions - #7

As you get near the purchase and financing of a fire truck, the next question is tougher than the rest.

How do I avoid making a financing mistake?

The problem is most people have not financed many fire trucks in their lives.  So, they may not be aware of what mistakes can be made.  Let alone, if they are making one.

What are the common fire truck financing mistakes?

  • Selecting the wrong term (or repayment period).  This means too short or too long.  Too short means you use too much of your budget for the payment and don't have enough extra for contingencies.  Too long means still paying on a truck that is also starting to need repair costs or beyond its useful life.
  • Selecting the wrong down payment.  If you pay too large a down payment, you drain your rainy day funds and may be in trouble in an unexpected event.  If you pay too little, you pay too much for borrowing costs.
  • Paying too much.  It's easy to focus on the rate but miss other information that adds to your borrowing costs.  And it's more than fees.  As an example, timing of payments during your budget year is a small tweak that saves thousands of dollars.  Yet most departments don't ask and miss this opportunity.
  • Don't set up apple to apple comparisons.  As mentioned above, borrowing cost is more than just the interest rate.  Yet most departments look at different offers and compare rate.  Total Borrowing Cost is a comprehensive and modern method to compare financing offers.  Request that information and you'll be amazed how easy it is to compare different choices.
Summary
No one likes to make a mistake.  And financing mistakes are mistakes that take years to show up.  It's important to prepare yourself to avoid common financing mistakes.


Stay safe!
John R. Hill
President
First Bankers