CALGARY, Alta. - Whether you're a first time owner/operator or a veteran fleet owner, there comes a time when you have to re-evaluate your current buying cycle. There's no fixed formula when it comes to deciding which buying cycle is best for you,...
PROS AND CONS: Sure, it's nice to be running down the highway in the latest offering, but is it always the best purchasing decision?
CALGARY, Alta. – Whether you’re a first time owner/operator or a veteran fleet owner, there comes a time when you have to re-evaluate your current buying cycle. There’s no fixed formula when it comes to deciding which buying cycle is best for you, because it varies depending on factors such as the value of the Canadian dollar, the application you’re running and the mood the finance company happens to be in on that particular day.
Currently, finance companies are often more eager to put a first-time owner/operator into a new truck than a used truck. Because of the high rate of owner/operator bankruptcies, finance companies take comfort in knowing they will have some equity if the customer goes broke while driving a new truck.
If it’s a brand-spankin’ new truck you’re purchasing, you have the comfort of knowing you’re driving a truck that generally carries about an 800,000 km extended warranty. And that’s one of the things that makes finance companies smile when they extend you a loan for a new truck.
But it’s not always the best decision for the buyer, explains Jim McAllister, sales manager with Gerry’s Truck Centre in Ontario.
“I think everyone starts out with the intent that they’d like to have a big new, shiny truck, but our job is to come in and qualify him a little better and say ‘I can sell you that truck, but you may be further ahead to think about this one,'” says McAllister. “You’ve got to fit something into the guy’s budget and if he doesn’t have a budget made out yet, then he’s got some homework to do. The last thing we want to do is drive a square peg into a round hole.”
McAllister compares getting that first truck to getting married.
“You want that 4,000 sq. ft. home on a half acre lot in a nice neighbourhood, but if you’ve got no money to buy it, you have to settle for an apartment or condo. (Customers) like to see that nice big condo truck with all the chrome on it, but really if a guy sits back and thinks clearly about it as a business decision, it’s better to start a little smaller and work your way up.”
Still, the temptation to leap right in and buy the shiniest new truck on the lot is hard to resist – even for a first-time buyer. Especially since finance companies often make it a more attractive option.
Larry Miller, sales rep with Hamilton, Ont.’s Eastgate Truck Centre, says when buying a new truck “Your down payment is a lower percentage and it’s a longer term, versus a higher percentage down payment and a shorter term with used (equipment).”
He adds “You can step into a new truck with 10 per cent of the purchase price and you can have it stretched to 60 months (if it’s a vocational truck you can even get it stretched to 72 months). If you’re buying a late model used, unless you’ve got low mileage and an extended warranty, you want to make sure you’re buying it right because the percentage down on used averages anywhere between 15 and 20 per cent.”
That may seem like a backwards policy, but he says it’s driven by finance companies operating in a tumultuous and uncertain industry.
“Finance companies are really tightening their belts now and they have a tendency to finance a first-time owner/operator on a new truck versus a used, strictly because they know they have more equity in the new with all the extended warranties,” says Miller. “If you’re a first time buyer, your chances of purchasing new versus used would be greater. They have the equity in it and they have the warranty protection if they have to remarket it in the event of a default.”
He adds “I find a good percentage of the repos have been units that have been purchased used.”
What’s a finance company to do with a tractor that has no warranty and 800,000 kilometres on it? It certainly won’t recoup its investment.
That doesn’t mean that first-time O/Os – or any truck buyers for that matter – should buy new equipment simply because it’s made simpler by the finance company. Used trucks can be a good buying decision – if you do your homework.
There are three main rules of thumb: Purchase a one-owner truck if possible; see if the maintenance records are available; and try to purchase a truck that’s still covered under an extended warranty.
“If you’re purchasing a late model used (tractor) that has in the neighbourhood of 500-600,000 kilometres, than you’ve got some form of insurance policy knowing you have a couple hundred thousand kilometres of warranty remaining,” explains Miller.
Gerry’s Truck Centre’s McAllister says some applications just don’t require brand new tractors to get the job done – for instance local deliveries or vocational applications.
“It may not make sense for (a customer) to tie up 100 and change for a new daycab, or even 80 grand for a new daycab if he’s going to be home every day,” says McAllister. “But if he’s going to do a slip-seat run and put another driver in his truck and do two legs of an 800 mile trip every day, then he can justify having a new vehicle.”
McAllister suggest that a 60 month buying cycle is ideal for a single operator, while teams should turn their trucks over every 36 months.
“The trucks today are built and the warranties are all geared towards 60 months (for single driver applications). Forty-eight would be great but nobody seems to pay enough money for the guy to pay in 48 unless he’s got a lot of equity. But there’s nothing wrong with a 60 month cycle.”
Jeff Sass, market segment manager for Kenworth’s on-highway segment, says a three- to four-year buying cycle is ideal.
“If you’re doing a straight 100,000 miles per year and getting 300,000 or 400,000 miles on the truck in three to four years, then that’s a good time to look to trade out,” says Sass. “Three to four years is a good rule of thumb. If you start getting into that fifth year, then your chance for maintenance costs is going up a lot greater.”
In fact, Kenworth published a white paper on life cycle costs earlier this year which outlined the benefits of opting for new equipment over used. The paper compared the costs of operating a five-year old tractor compared to a brand new tractor and found that there was a US$13,777 advantage to be had by choosing to buy a new tractor rather than operating the older equipment. The bulk of that savings was attributed to higher maintenance costs and the fact that there are significant depreciation tax benefits involved in purchasing a new tractor.
The white paper explains its rationale: “In regards to engine maintenance costs, after 400,000 miles a valve adjustment and the replacement of the thermostat and the air compressor are predicted,” reads the report. “The electrical costs for the current tractor reflect the replacement of headlights, wiper blades and a speed sensor, which will not have to be done in the first year of a new vehicle. Chassis and cab expenses for the fifth year include a suspension alignment and repairs to the air system, heater, horn, mirrors and seats. The current tractor example also shows having one roadside service call and one towing event.”
Sass generally advises that linehaul owner/operators and fleets opt for new trucks – if it’s viable.
“New trucks, in my opinion, are always the best way to go,” Sass says. “For established fleets that have a cash flow and can take advantage of the tax depreciation, the new truck cycle of going three or four years maximum is probably the best, just because of the maintenance costs. The older trucks have higher operating costs than newer trucks – it’s just a factor of use over time.”
Another factor to consider is the current value of the Canadian dollar.
“The fluctuation of the dollar has a big bearing on the price of new trucks,” explains Miller. “When the dollar is really weak, the cost of new trucks accelerates so you have more of a tendency to look at used (trucks) because you get better value. When the new trucks go up in price, the used trucks go down and vice-versa. It’s kind of a supply and demand situation.”
Lately, Miller has observed that new trucks are in demand at an approximately two-to-one ratio over used trucks.
“It has to do with the fact they can get i
nto new trucks with less money down,” he reasons.
The typical price of a used tractor is $60,000 with a 15-20 per cent down payment.
“You can buy a brand new double bunk truck today for the mid-120s for the same amount (if not less) down and a much longer term,” says Miller.
Every decent dealership has a sales staff on hand that is willing to sit down with you and discuss your particular application and budget. Your best bet is to find a good sales rep and be frank with them so they can help hash out the details of what’s best for your specific application.