Wednesday, February 25, 2015

Fire Truck Leasing bad questions - #4

I get asked the same questions almost every day and I thought I'd share the bad questions and why they don't help you.

Bad question #4 - Do we have to make a down payment?

There are a couple of reasons this is a bad question, one strategic and one financial.

Why this is a strategically bad question

A fire truck purchase is a major, major purchase.  It is not one that usually sneaks up on your department.  You've known for a few years (at least) that you needed to replace a truck due to larger repairs, out of stock parts, more down time, or just lack of modern safety or other features.

So, if you have not been saving up for the purchase, you are about to inject a large capital purchase into an unprepared situation.  So, having no down payment because you haven't prepared is a strategic mistake.

Why this is a financially bad question

The other reason departments don't want to make a down payment is that they want to keep a higher savings balance.  And no department should drain their savings down to (even almost) nothing for a new truck.  Good financial practice means having a sufficient financial reserve or rainy day fund, between 6 and 12 months of revenue.

But some departments want to keep the excess savings and finance more of the truck thinking they can earn more on the savings than pay in truck loan interest.

There is a fancy financial word for this, it's called arbitrage.  Arbitrage is a highly risky financial strategy and can be disastrous if not handled right.  Even smart people get burned by arbitraged investments.

Summary

A lack of down payment is a poor plan on a couple of different levels.  Your department should strategically start to save as much as you can when the older truck is seen as being at the end of its useful life.

And you should use those funds to pay as much of the truck you can in cash (not borrowing) and avoid tricky financial schemes.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, February 18, 2015

Fire Truck Leasing bad questions - #3

I get asked the same questions almost every day and I thought I'd share the bad questions and why they don't help you.

Bad question #3 - Is there a prepayment penalty?

Everyone asks this every time.  The idea here is that you want a lower payment but think you may be able to pay more. And assumes that this strategy's only cost is a penalty.

Here's why this is a bad plan

This plan is based on being conservative and/or optimistic. 

It's conservative when you can afford a higher payment but want a lower payment.  So, you lock into a longer term at a higher interest rate and always keep a higher principal balance.  So, you pay a lot more interest even without a penalty.

It's optimistic when you can afford a payment but hope or believe you will earn more in the future and can pay higher payments.

Summary

Instead of asking this question, share the truth.  You can afford a higher payment or expect more money in the future.  When you share this information, your banker can customize a repayment plan that fits your situation.


Stay safe!
John R. Hill
President
First Bankers

Wednesday, February 11, 2015

Fire Truck Leasing bad questions - #2

I get asked the same questions almost every day and I thought I'd share the bad questions and why they don't help you.

Bad question #2 - What's the payment for 3, 5, 7, and 10 years?

Or, any other large range of repayment years (called terms).  This is a budgeting question being asked as a financing question.

For a typical $300,000 truck, the range of payments for the above question is from $33,000 to $102,000.  A big range.

What the banker learns about you when you ask this question

You haven't done any homework.  There are enough financing calculators online to help you narrow in on a ballpark payment.  In other words, before you call, you should know you have a $100,000 budget or a $30,000 payment budget.  Or somewhere in between.

The banker will talk a lot to you about affordability - the lowest payment.  And they won't talk to you about cost.  So, you'll pay more.

 

Summary

If you are asking for the "whole menu", you'll flag a banker that you are not experienced.  And you'll be put in a position to pay unnecessarily higher financing costs.

Do your homework and narrow your budget a bit before you call. 

Stay safe!
John R. Hill
President
First Bankers

Wednesday, February 4, 2015

Fire Truck Leasing bad questions - #1

I get asked the same questions almost every day and I thought I'd share the bad questions and why they don't help you.

Bad question #1 - What's the interest rate?

Now, this isn't a "bad" question but it isn't really a good question.  And the reason it's not good is that is doesn't provide the information you really need to make a good financial decision.

Now the unasked question really is:  Who will provide the best deal?  But the rate question does not find that.

Here's why this is a bad question

This question seems to evoke some good information in the answer.  But does it?

If you aren't familiar with interest rates, how can you know if a rate is good or bad?  If the answer is 2%, how do you know that's good?  Sure, you can compare to the other places you called but...

Rate does not include everything.  So, one place offers 2% but has a lot of fees and costs.  Another place is 2.25% without any fees.  Or another place has a 1.9% rate but has a lot of strict terms and conditions that will cost you a lot to comply with.

Which is the best deal?  The rate question alone doesn't help answer this question.

Summary

Most (really all) callers ask this question because it seems right.  But there are other, better questions to get to the heart of what you want to learn.

Rates are all pretty close.  The money market is efficient which means that there won't be one very low rate.  Everyone will be very close.  And the differences in close rates is only a few hundred dollars at most. 

Using the rate question alone will not identify the best deal.


Stay safe!
John R. Hill
President
First Bankers