Wednesday, October 19, 2011

Fire Truck Turn-in & Trade-in leases - Myth #2

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 #2 - They are cheaper

When this myth is spoken, it is couched in a somewhat deceptive comparison. Usually, the 5 or 7 year turn-in payment is compared to a 5 or 7 year traditional lease.

The undisclosed fact is that with a traditional lease, you will be paid off in 5 or 7 years - as opposed to the residual amount/balance your department will still owe under the turn-in or trade-in lease.

So, the traditional 5 or 7 year traditional lease purchase payment will appear larger than the turn-in or trade-in payment. It is because you are completely paying off the truck cost in the traditional lease and not paying off the truck in the turn-in or trade-in lease.

Here's the skinny how to have apples-to-apples comparison
The turn-in or trade-in lease is based on an 8 1/2 year term. So, to properly compare the payments, use an 8 1/2 or even 9 year traditional lease purchase term to compare payments equally.

You'll find that payments are roughly the same - and will even be cheaper when using a 9 year term compared to the 8 1/2 year term.

So, even though the comparison in the marketing materials shows much lower payments, the fact is that thees types of leases do not offer dramatically lower payments.

A note: These contracts are usually offered with a tax-exempt interest rate. However, there is some controversy if they do qualify for tax-exempt rates. The IRS has not ruled on this topic and you could find yourself in tax court being the first to discover if the exemption stands.

A final note about costs. Turn-in and trade-in leases only mention the payment costs in the upfront materials. However, in these type of contracts, your department is liable for excess wear and tear or unacceptable condition of the vehicle upon turning in or trading in. Your department is not liable for these costs in the traditional lease purchase contract.

Since this information is not known upfront (you'll only find what you owe at the end of the term), it's difficult to include this very real cost in your analysis. This can be an additional and significant cost in the ownership and financing of your 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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