Truck and Trailer Loans and Leasing

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1. Commercial Truck Loans – How Does it Work?
2. Uses
3. Mechanics of a Commercial Truck Loan
4. Eligibility for Securing Financing
5. Key Advantages
6. Points to Consider
7. How to Apply For A Truck Loan
8. Frequently Asked Questions About Truck and Trailer Loans and Leasing

Commercial Truck Loans – How Does it Work?

Trucking plays a pivotal role in Canada’s economy, contributing an estimated $34 billion to the country’s GDP. Beyond this economic value, it’s instrumental in the freight movement of goods, including consumer products and foodstuffs. The Canadian Trucking Alliance estimates that more than 90% of all consumer-end goods are transported entirely or partially by truck. Such an immense demand for trucking services necessitates a significant number of trucks, owned or leased by a diverse array of trucking companies spread across the country.

The decision to purchase or upgrade a truck often leads trucking companies or independent truck owners to seek commercial loans. These loans are specialized financing solutions that cater to the unique needs of the trucking industry.

Truck financing works similarly to other forms of financing. However, it’s specifically designed for acquiring various types of trucks required by businesses, ranging from semi-trucks to dump trucks. The process of applying for a loan typically involves assessing the applicant’s credit history and the down payment they can afford. Once approved, truck owners can use the money to purchase the truck they need, increasing their business capacity and profitability.

In addition to the truck loan, truck insurance is another critical component to consider. This insurance protects the truck owner’s investment and is often a requirement during the financing process.

Commercial truck loans offer a viable path for businesses to expand their operations, meet growing demand, and contribute to Canada’s thriving trucking sector. These loans, coupled with suitable truck insurance, provide the necessary financial framework for businesses to prosper in the trucking industry.

Mechanics of a Commercial Truck Loan

Commercial truck loans function as secured loans, where the truck itself serves as collateral. This parallels personal auto loans, but the similarities largely end there, as truck financing has its own distinctive elements.

Given the cyclical nature of the trucking industry, these loans typically carry higher rates compared to traditional auto loans. This is due to the perceived increased risk financial institutions associate with the trucking business, especially for a new business or smaller trucking companies. To balance this risk, they set higher rates for each truck loan. This risk profile often exceeds the parameters of traditional banks or credit unions, which tend to adopt more conservative lending policies. Consequently, trucking companies frequently need to seek alternative financing options.

Unlike a personal auto loan, where the borrower is approved for a maximum loan amount and then selects a vehicle within that budget, truck financing requires the borrower to identify the specific truck they wish to purchase beforehand. This could be any type of truck, from box trucks and dump trucks to tow trucks, depending on the services the business provides.

Upon approval, the financing institution calculates the loan term length and monthly payments, taking into account the cost of the chosen truck and the borrower’s ability to pay. The purchased vehicle acts as an asset that could be seized in the event of default, providing a measure of security for the lender.

Commercial truck loans in Canada are tailored financing solutions that accommodate the unique needs and challenges of the trucking industry. These loans allow a business to acquire the truck you need, despite the inherent risks, and contribute to the economic movement of goods across the country.

Securing a commercial truck loan involves a holistic review of the financial capacity of the trucking company, credit history, the truck’s value, and the overall viability of the business. Ensuring these elements align favourably can improve the likelihood of loan approval with competitive rates.

Key Advantages

There are several variables that lenders will consider before issuing a truck loan. Some of these are as mentioned below:

Stamp Your Ownership:

Each payment made towards the truck loan is a step towards owning the truck at the end of the loan’s life. This enables the borrower to enjoy the benefits of ownership such as vehicle modifications and/or being able to sell the truck at the end of the loan term. This is in contrast to the leasing option, where the lessee simply pays for the privileges of being able to use the truck during the lease period.

Tax Benefits:

The entire process of buying the truck via loan through a financial institution or credit union, could potentially provide tax benefits as it could potentially qualify for tax savings from depreciation.

Points to Consider

On the flip side, a lease allows the borrower to use the vehicle for a pre-defined number of months before turning it back in to the vendor and securing a new vehicle. Some other drawbacks of ownership via truck loan are:

(Possible) Negative Equity:

When the vehicle is purchased, the loan payments reflect the entire cost of the truck. However, in early years, depending on depreciation policies, the value of the truck on the company’s books could decline at a faster rate than the loan’s principal. This means that borrowers that put up lower down payments end up owning a vehicle that is worth less than what they are paying for it.

Initial Outlay:

Most lending institutions will require a down-payment to be made before the truck loan can be underwritten. For borrowers with financial constraints, this is therefore often not a feasible option to pursue given the quantum of the down payment.

How to Apply For A Truck Loan

Obtaining a truck loan in Canada involves a systematic process to ensure the best interest rate and loan terms. Here are the step-by-step details:

1. Determine Your Needs

Start by identifying the type of truck you need. Are you looking to finance older trucks, or do you require a new one? Understanding your needs helps determine the size of the loan.

2. Evaluate Your Finances

Review your financial health. Do you have enough assets to support the loan? Evaluate your cash flow, ensuring you have enough money to cover the monthly payment.

3. Research Lenders

Look into various lenders, including banks, credit unions, and other financial institutions. Each lender has different criteria and interest rates, so it’s essential to find one that best aligns with your situation.

4. Prequalify for the Loan

Prequalifying gives you an idea of the interest rate, term length, and loan amount you might qualify for. Most lenders in Canada offer this service, helping you estimate your monthly payment.

5. Select the Truck

Once prequalified, choose the truck you want to finance. Remember, the truck will act as collateral, so its value is crucial.

6. Official Loan Application

With your chosen truck, apply for the loan officially. The lender will review your application, assessing your creditworthiness and the truck’s value.

7. Loan Approval

If approved, the lender will provide loan details, including the final interest rate, term, and payment schedule. Review these terms carefully.

8. Finalize the Purchase

After accepting the loan terms, finalize the truck purchase. The lender will guide you through this process, ensuring the truck’s title is appropriately transferred.

9. Begin Payments

With the truck now in your possession, begin your loan repayments as per the agreed schedule. Timely payments can help build your credit score.

10. Consider Leasing as an Alternative

If obtaining a loan seems challenging, consider leasing the truck. Leasing often requires lower upfront costs and allows you to upgrade the vehicle regularly.

What the Numbers Say

Based on trucking industry statistics released by the government, there are approximately 111.7k establishments that generate an average revenue of $289.6k, implying a total industry size in Canada of $34 billion. The space is also highly fragmented as evidenced by 99.4% of these entities having less than 100 employees i.e. small to mid-sized companies. Lastly, it is worth noting that 81.7% of entities were profitable in 2016. The trucking industry tends to correlate with general economic performance; due to relative outperformance over the last few years, the industry has been one of the benefactors of this economic strength.

Frequently Asked Questions About Truck and Trailer Loans and Leasing

1. Can I use a truck loan to buy a used truck in Canada?

Yes, you can use a truck loan to finance the purchase of both new and used trucks. The truck itself, whether new or used, serves as collateral for the loan. However, lenders may assess used trucks differently, given their age and condition. Always remember that the value of the truck as an asset is significant in securing the loan.

2. How is a truck loan different from a car loan?

While both car and truck loans allow you to finance vehicle purchases, truck loans often involve larger amounts due to the higher cost of trucks. Additionally, truck loans are typically used for commercial purposes, which may influence the loan terms, interest rates, and required documents.

3. What are the typical requirements to qualify for a truck loan in Canada?

Qualifying for a truck loan typically involves a credit check, verification of income, and sometimes a down payment. The truck you plan to purchase also plays a significant role, as it serves as collateral for the loan. Lenders will assess its value and condition as part of the approval process.

4. Is it better to lease or take out a truck loan?

Both leasing and taking out a truck loan have their advantages. Leasing often requires less upfront cost and offers the flexibility to upgrade your vehicle regularly. However, a truck loan leads to ownership, which might be beneficial for long-term commercial use. The right choice depends on your financial situation, business needs, and personal preferences.

5. Can I still get a truck loan if I have poor credit?

While a strong credit history and significant assets improves your chances of securing a truck loan with favorable terms, many lenders in Canada work with individuals who have less than perfect credit. Some lenders specialize in bad credit truck loans but be aware that these may come with higher interest rates due to the perceived risk.