What you need to know to upgrade your truck

Time to Trade?

A Man Checking Vehicle

A good maintenance program will extend the life of your truck, but eventually, you’ll be in the market for a new rig. No matter how rigorous your PM efforts, the time will come when you’ll spend more on maintenance than you would upgrading your truck. How will you know when that time comes? Your maintenance records will tell you. 

Truth in numbers

Maintenance costs typically rise in the third and fourth ownership years. Fifth-year costs often drop because the truck needs certain work in its fourth year that isn’t required the following year. However, the cumulative cost of maintenance — your average cost per year since you took ownership — and your cost per mile will still increase each year. 

Take a look at your maintenance budget and expenses. When they reach a point that seems excessive, ask your business services provider to help you determine how much your fuel, oil and maintenance costs have increased due to the truck’s age. Your financing source can provide options for a new truck purchase, and your accountant can help weigh potential depreciation benefits. Check with your insurance agent to find out how an equipment upgrade will impact your premiums. 

According to industry experts, you should think about replacement when your fuel mileage drops 2 mpg or more despite conservation efforts, or if truck technology develops to the point that a new truck would get an additional 2 mpg. Another indicator is when total maintenance costs reach 15% of gross revenue. 

Generally, you should consider a new purchase when the principal, interest, maintenance and operating costs of your old truck are higher than the comparable costs attached to a new vehicle. Remember that the estimated resale value of the old vehicle, combined with any manufacturer’s incentive on a new vehicle, may offset the new vehicle’s higher cost. At this point, a trade makes sense.

Acquiring your truck

Affording your truck has become a complex proposition in recent years as costs have risen dramatically. A truck loan is usually spread over four to seven years for a new vehicle, and with many contracts, you pay more interest during the early part of the loan, and more principal in later years.

Financing a truck can be costly and frustrating, especially without the right preparation. Give yourself plenty of time not only to shop for your truck, but also to shop for your financing. Knowing the risk you present to a lender will help you position yourself during the purchasing process.

Before you begin, obtain a copy of your credit report, which you can obtain for free once per year from the credit reporting agencies. Credit reports can obtain incorrect information, which you’ll want corrected prior to attempting to obtain financing. If your report has harmful information, you’ll want to be armed with information explaining the situation to your lender.

You’ll also want to have on hand your budget, cash-flow statement and business plan. The budget will prove to a lender that you’re able to meet your financial obligations, while the cash-flow statement will show your projected revenue is sufficient to meet your current obligations. A business plan details your operation, including the types of freight you haul, the traffic lanes you run, the rate you’re paid and the company to which you lease.

Credit counts

A Man Using Calculator

One thing that will help tremendously when purchasing your truck is a good credit score. Bad credit can add tens of thousands of dollars to the price of your vehicle by increasing the cost of borrowing money.

For a self-employed person, personal credit and business credit are indistinguishable. Self-employed people sometimes want to show a loss at the end of the year for tax purposes, but be sure you’re able to explain that negative net income to a lender. You can try to make clear to the loan officer the distinction between your business finances and your personal finances, but credit bureaus don’t make that distinction.

Here’s a breakdown for how your credit score is calculated: 

  • Your payment history: 35%. 
  • Outstanding debt: 30%. 
  • The length of your credit history: 15%. 
  • The types of credit you use: 10%. 
  • The new credit you request: 10%. 

The good news is that even the worst credit situation can be improved. As little as two or three years of good payment behavior can make a positive difference in your credit score, which assigns more weight to recent acts than to older ones.

Once you’re ready with financing in hand, select your truck wisely. Your paycheck will show if you chose a truck engineered to meet your business needs and help you succeed.