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As sales numbers have flattened and values have crashed, financing a used truck purchase has become a tough task for dealers and customers alike.
“For the past 12 to 18 months it has become increasingly difficult to acquire financing for used trucks because they don’t book well,” says David Bibler, finance manager at Truck Country.
This can be traced to depreciation rates. Used trucks that don’t move quickly are slipping in value, making it harder for dealers to maintain the margins seen in the market during its earlier decade boom. This can mean the dealer either loses money on a lower sales price or struggles to find a lender willing to finance a sale at an inflated price.
“Creditors know how much that truck is worth now, and it’s hard for them to [finance] it,” Bibler says.
But proactive dealers say there are ways to get over the hurdles of the current used truck market.
When it comes to financing a used truck sale, “one size does not fit all,” Bibler says. Dealers looking to move used trucks must be able to provide customers options that can be structured to best fit their financial capabilities.
These can include down payment, choice of loan vs. lease, and interest rates, which have risen in recent years.
“When I walk in and sit down with a customer, my first question is, ‘What do you need me to do for you?’” says Bibler. “My job is to get that customer financing.”
For first-time purchasers or owner-operators with minimal credit history, Bibler says one useful tactic is building a customer up to their ideal truck.
He gives the example of a new driver setting his sights on a $100,000 tractor. Bibler says he’ll accept the customer’s credit application and submit it to the lenders he believes would be most likely to work with the buyer, but while doing that he also works with his sales team to develop a secondary option. This option is usually a similarly spec’d truck that’s a few years older and much more affordable.
“Sometimes you can tell a person is not going to be able to afford that much truck,” he says. “I’ll go back to the customer and explain that to him and try to sell them on that second option. ‘Maybe you run this [more affordable] truck for two or three years, and if your payments are fine, then we’ll trade you out of that truck and step you up to the first one.’”
Steve Clough, president at Arrow Truck Sales, adds, “You never want a customer to fall in love with a truck and then try to figure out if they can afford it.”
Managing interest rate expectations is another key step, adds Vanessa Ciervo, finance and accounting manager at H.K. Truck Center.
“There’s definitely some sticker shock when it comes to what banks are offering” compared to lower rates found in new vehicle markets, she says. “I think some customers don’t realize that when you’re dealing with commercial trucks there is a new rate and a used rate, and with the used trucks the rates are higher.”
She adds, “There’s also cases where a customer is watching TV and sees a car dealer is offering zero percent financing for 60 months and asks, ‘Why can’t I do that?’”
Arrow Trucks Sales is one of a few dealers that has its own its in-house financing division. Clough says Arrow’s familiarity with the used truck market allows it to understand market turbulence better than external lenders, enabling the business to avoid excessive changes in financing rates during trying times.
He says Arrow’s rate changes are driven more by the cost of funds to borrow, not changes in the business environment.
“I think a lot of lenders tighten up [rates], as well as availability of credit, when the horse already is out of the barn, so to speak. In reality, their risk now is probably less than it was a year ago when they were aggressively trying to lend money,” he says.
In cases where a customer needs a truck now but still feels a better rate is available, Ciervo provides loans with no pre-payment penalties to encourage a sign-and-shop strategy. “If you think you can get a better rate from your local banker down the line, you can accept ours and then pay it off when you get another one,” she says.
Finding the right lender is equally important, as some financiers are more comfortable with specific customer types.
“I have a few lenders who just want vocational business. I have others who are better with trailers than they are with trucks,” says Bibler. He cites duty cycle and cash flow as reasons for the selectiveness. “They know what freight pays.”
Lenders also heavily factor age and mileage when presenting loan repayment options, with newer, lower mileage tractors typically garnering longer terms. Clough says Arrow likes to focus on total cost of ownership.
“Customers shouldn’t only be thinking about their monthly payment. They also need to think about their revenue and how much money they are going to need in order to maintain the truck and pay for all of their operating expenses,” he says. “If they cut corners by delaying maintenance, eventually the truck won’t be able to work for them, and then what do they really have?”
There are tricks for financing larger purchases, too. Bibler says he’s had success splitting the lending sources in multi-truck deals.
“It reduces the risk to the creditor and helps the customer if they’re in a growth period for a year,” he says. “You don’t want to go to a creditor for a 10-truck deal and have them say they are full.”
This report is from Big Iron Dealer’s sister site, Successful Dealer, and is part of a series on the best practices for moving used trucks. Read the previous report, “Five dealer advantages from using auctions for trucks,” here.