Wednesday, October 12, 2011

Fire Truck Turn-in & Trade-in leases - Myth #1

I've seen a resurgence in departments considering turn-in, trade-in, or walk-away leases. There are a lot of myths out there and we'll explore a few.

Myth #1 - They are more flexible

When this myth is spoken, its about the operational flexibility rather than the financial flexibility.

Manufacturers sell this sophisticated financial device so that you can get a new truck in 5 or 7 years if you don't like or have outgrown the truck you are buying today.

However, financially, these types of programs are very inflexible.

Traditional lease purchase financing has a contract that requires you to pay payments and then you own the truck to do as you wish. So, you pay 5 or 7 or 10 or 15 payments and then you own the truck.

In the turn-in, trade-in, walk-away leases, you are required to make payments BUT you are also required to take some action in 5 or 7 years.

You are forced to:
  1. Buy a new truck. If you don't want to or can't buy a new truck, it doesn't matter. you have to buy a truck at the future, inflated prices at current rates (if financed), or
  2. Refinance the balance. If you want to keep the truck, you have to then engage in another lease or loan to finance a 5 or 7 year old truck at used truck financing terms.
  3. Pay off the residual. The residual is the balance you owe at the end of a financing contract like this. So your department may find itself making a large payment at just the wrong budget time.
A final note about flexibility. I offered that these contracts are sold offering operational flexibility but even that is limited. In a contract like this, you are responsible for the condition of the truck during the time you use it. So, if repairs are not made or service is not made according to the terms, you will owe money as compensation for the unacceptable condition of the truck.

Manufacturers have tried to wrap a very sophisticated financial contract in simple terms. If you don't understand the terms or ask the right questions, you can fall prey to the myths of these types of financing.

P.S. These type of contracts are acceptable for some departments. It's critical to understand if they are acceptable for your department. This series of articles is not about stopping any of these transactions, merely educating departments how to use them wisely.

Stay safe!
John R. Hill
First Bankers

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