Truck Financing Costs.
The 'cost of capital' can be a significant and often overlooked portion of the total cost of owning of a fire truck.
Understanding all of the aspects of financing the purchase of a fire truck is beyond the scope of this article, but here are a few basic considerations.
- Closing fees associated with financing
- Interest rate you will pay on the borrowed funds and term of the loan
- Prepayment penalties or "adjusted amortization tables" that will cost additional funds should you decide to pay off early.
1. Closing Fees
Closing Fees, this is the most basic cost incurred when borrowing money. Whatever financial institution you are dealing with will have costs associated with the transaction of loaning you the funds. They can include an origination fee, title search fee, doc fees, etc. These are real costs incurred and must be paid by someone in the process. Sometimes these fees are broken out and paid as a part of closing, and sometimes the financing institution will consider these a "cost of doing business", and simply roll these into the second main cost portion of the financing, which is...
2. Interest Rate
The Interest Rate is the amount a lender charges for the use of assets expressed as a percentage of the principal or borrowed funds. This is the big driver we all watch when engaging in any sort of loan. How much will the lender charge us for "renting" their money to us? The higher the rate, the more cost we have in the total cost of our truck's and fire truck fleet's ownership. Sometimes items are financed, but then a decision is made years down the road to pay off the note or to sell the vehicle and pay off the note, which can trigger...
3. Prepayment Penalties
Are there Prepayment Penalties or "adjusted amortization tables?" - This is an important factor to understand with any financing arrangement. The lender will give you an "amortization table" which shows the scheduled payments, interest and principal amounts of each payment, and eventual retirement of the debt. But, should you decide to pay some of that early, you must get a clear understanding of exactly how those funds affect the remaining debt you owe.
Sometimes firms will charge a strict "prepayment penalty", meaning 100% of your funds will not go to pay down the debt,
Sometimes they will not allow prepayments at all, and
Sometimes they will have alternative amortization tables for prepayment vs. the note payment.
Financing the purchase of a fire truck can be complicated so it's critical you understand if there are prepayment penalities on the front end. Miscalculating these fees can affect your ability to manage your fleet appropriately in the future. Funds you thought you could apply toward a new truck, or equipment, could end up going to pay for the privilege of paying down your debt earlier than you agreed upon.
It takes time to know exactly how the financing arrangement of your truck purchase works.
A thorough analysis of these costs is important if your goal is to maximize the value of the fleet and make sure that the best fire trucks are on the road for your Fire Department and your community.
This post is #3 in a series of 6 plus an overview post:
Overview: Total Cost of Ownership
#1: Soft Costs
#2: Truck Purchase Price