Wednesday, November 28, 2012

Fire Truck Leasing - Wrong question #2

I get two wrong questions with every call.  The problem is the questions don't help the fire department as much as it seems and they actually can cost thousands of dollars.

 Wrong question #2 -  Can we pay this off early?
 The reason that this question is wrong and will cost your department money is two-fold.  It suggests your department in considering a improper financing term.  It happens all the time.

A department will agree to a 10 year term with the intention of paying it off in 7 years, for example.  In other words, the department feels it has the budget to pay the truck sooner than later but agrees to a longer term and smaller payment.

How this costs money
First, you are paying a higher rate of interest.  A longer term always has a higher rate.  In this case, you are paying a higher rate without the benefit of the longer term if you pay off early.

Now, this thought process is always couched in "being conservative" and having some extra room.  But, the cost is high for this plan and paying a lot more isn't very conservative.

Second, although 100% of departments ask this question, less than 2% actually follow through.   Something always happens and they don't pay sooner.  The "extra" money always finds someplace else to be spent.

So, the plan to be out of debt quicker falls apart fast.

This question shows a bank that your department is willing to overpay for financing.  If you have a plan for a shorter term, select that term and reap the rewards of a lower rate and less costs.

If something happens, you can always extend the terms later.

Stay safe!
John R. Hill
First Bankers

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