Before You Sign that Lease-Purchase Agreement…

23572182_sIt seems like a smart move: don’t dive head-first into truck ownership. Sign on with a carrier’s lease-purchase program and ease into being your own boss, leaving the responsibility for the financing to the carrier.

But what happens too often is the driver signs on the dotted line without reading or understanding the contract. They trust what the company rep tells them and don’t get a lawyer to help sort out the details.

Unfortunately the contract is written to protect the carrier, who remains the legal owner of the truck until the driver has the title in hand. That means you have all the financial responsibility of truck ownership – maintenance and repairs – without any of the financial benefit of building equity in the truck.

And the risk of your truck loan being through the carrier (vs. a bank) is that you’re pretty much stuck with them. If they drop your miles or start charging you more for incidentals, there’s not much you can do.

Not To Say it Can’t Work

Lease-purchase deals have worked for experienced drivers who were careful about who they signed on with. In this Overdrive Online article, you can read about Andera Jackson, a Dayton, Ohio, trucker with 24 years experience, who is in a lease-purchase agreement with U.S. Xpress of Chattanooga, Tennessee, and close to owning a 2007 Freightliner Century.

His advice? “Know what you’re getting into. This is my third lease-purchase. I did two one-year leases before this one. It gave me insights into what’s going on.” He thinks the right program can be a great deal for a business-minded driver.

Most carriers are honest and don’t set out to fleece drivers, but know that you’re taking big risks with some of the agreements that are out there. Some things to investigate before you commit to a lease-purchase agreement:

Make Sure the Carrier’s Financial Health is Good

One risk, as Timothy Brady explains in this post, is that if the carrier goes bankrupt, no matter how many payments the driver’s made, he loses any stake in the truck and it goes on the block as one of the carrier’s assets to be liquidated. Investigate any company you’re considering. If it’s a publicly traded company, you can find their annual report on their website. If it’s not, ask the tough questions about long-term financial prospects and debt level. Research the company’s reputation in the industry.

Be Clear What the Company Is Paying For

Calculating what it’s really going to cost to take on a truck payment, you need to know what you’re going to get nickeled and dimed for. The Owner Operators Independent Drivers Assoc (OOIDA) points out that layovers, detention time, canceled loads, multiple drops and picks, insurance, permits – all these together start to take a big bite out of your profits. (Click to see OOIDA’s long list of questions to ask the interviewer when you’re searching for a carrier to lease with.)

Consider All Your Options for Financing

Allen Smith, founder of Truth About Trucking, explains that even though some lease-purchase programs work well, the failure rate is high for most participants. But these plans attract a lot of aspiring truck owners because they’re the easiest route. Problem is, if they’re making it easy for you, it’s unlikely to be the most economical route. Consider these other options that will be cheaper and make you less vulnerable to the whims of your employer:

  • Lease from a third party – You’ll probably get a better rate and you’ll be able to drive the truck for whoever you want. You will need to have decent credit and a down payment. Some may also offer a lease-to-buy option.
  • Finance your truck purchase through a bank or the Small Business Administration – You’ll need a down payment and good credit, but you’ll have the flexibility to drive the truck for any employer and if things don’t go well, you can sell the truck and pay off the loan.
  • Save up enough to buy a truck – this is probably the hardest way to go, but it positions you best for success. You’ll pay no interest, won’t be saddled with a house payment’s worth of debt and can leave a carrier’s employment without paying a penalty.

Do You Really Want to Own the Truck Offered?

If it’s been leased many times before, it’s probably not a vehicle you want to own – and probably this means the lease-purchase program itself should be avoided. Look closely at all the maintenance records. Be sure the truck’s mileage seems reasonable for its age. The carrier should have records of any recalls and when they were resolved.  If warranties are offered, study the terms.

Prepare for the Payoff

Lease-purchase plans for newer trucks often require the driver to come up with a large payoff to complete the agreement and take ownership of the truck. If you don’t prepare, you could make payments for years and have nothing to show for it because you can’t make that final payment.

Make Sure You’re Cut Out to be a Businessman

Even if the lease purchase deal seems fair and a good way to become an owner, take a step back first and make sure the truck-owning life is what you really want.

Small fleet owner and radio show host Kevin Rutherford says most people considering the move to being an owner-operator will list three reasons they want to do it: First, usually is “to make more money. Then it’s more ‘freedom’, ‘less hassle’, ‘fewer rules’. If your answers sound like these,” he says, “think again before you proceed,” because you’re likely to be disappointed.

According to Rutherford there are better reasons for taking on the additional work and away-from-home hours. Drivers who transition successfully to owner-operators are usually those who do so because they want the additional responsibility and challenges of being a business owner, and want to build a business that will support better lives for them and their families. Read the list of questions Rutherford suggests you ask yourself to further test your assumptions about being an owner-operator.