Wednesday, November 2, 2011

Fire Truck Turn-in & Trade-in leases - Myth Summary

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

They are , in fact, less flexible. In these type of financing contracts, you are obligating yourself to more terms and conditions. You are also forcing yourself to do something when the time comes to turn-in, trade-in, or walk-away. Finally, you are required to maintain the equipment according to the terms of the contract rather than the simple terms of a traditional lease purchase agreement.

Myth #2 - They are cheaper
These type of contracts do not provide lower payments when measured apple-to-apple. The marketing materials compares a turn-in, trade-in lease payment for 5 or 7 years with a payment that completely pays off the truck in 5 or 7 years. These type of contracts are based on 8 1/2 year payoff terms and offer no substantial discount from a 8 or 9 year traditional lease purchase agreement. Finally, the IRS rules about the exemption of these type of contracts is untested in court and may not legally be a tax-exempt financing.

Myth #3 - They are simpler
They are more complex. Rather than simply paying a number of payments and owning the truck to use or sell as you please, you are obligating yourself to payments and some end of term option. You have many more choices or options or potential costs than a traditional lease purchase agreement.

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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