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Why fire truck financing is not like anything else

Financing for new apparatus is something that just can't be boiled down into simple soundbites


If something is not simple, most people try to simplify things. That is why most politicians try to boil down complex issues like social security bankruptcy into soundbites.

But, for complex issues like financing a fire truck, having only a simple viewpoint can be very expensive. Most fire departments waste thousands of dollars when getting a fire truck loan.

Here are five things you should know:

1. You're not just borrowing money. It seems to you that you're only getting a fire truck loan. You only ask what the payment and the interest rate are and then you believe you are set to make an informed decision.

Here's why it's not simple: The financial offerings when buying a fire truck have become amazingly complex over the past 10 years. Fire apparatus manufacturers now offer discounts, chassis payments, turn-in leases, rate locks, etc.

By having to sift through these very complex financial choices, your department is becoming the equivalent of a stock broker and investment banker all in one. Unless you have daily financial experience, something will be missed … and money will be wasted.

2. It's sneaky complex. When you borrow money in your personal life, all the terms are pretty much the same; the only thing you have to compare is rate and fees. Think 60-month car loans or 30-year mortgages. Those are simple common financing offerings without many options to choose from.

Here's why it's not simple: Financing a fire truck involves many more factors.

There are different pay frequencies such as annual or monthly payments. There is a science to how much down payment you should put down on a fire truck. There are considerations about how long to finance your fire truck as part of the entire fleet replacement plan.

For a car or house, you have two factors to compare — rate and fees. For a fire truck, there are seven factors — amount financed, financing term, payment frequency, payment timing, interest rate gimmicks, fees and costs, and  interest rate. If you miss any, you waste money.

3. It's highly regulated. The IRS has very specific rules about who qualifies, what process is to be followed, what the money is being used for, and what and how forms are completed. And you, as the borrower, are responsible to the IRS if anything is done wrong.

Here's why it's not simple: Do you have the knowledge and experience to know that everything is done correctly for the IRS? Do you know if the person who is doing this for you is doing it right?

The costs are high for a mistake. Fines, penalties, interest, and disallowance of your low tax-exempt rate are the costs for making a mistake like this. Again, you are responsible to the IRS if anything is missed.

4. Unique terms and conditions. Do you know what "gross-up" language is? Or, non-appropriation? Do you know what insurance you are required to carry for your fire truck loan? Are you bank-qualified? Or not qualified? Are you subject to arbitrage rebates?

Here's why it's not simple: These are all terms and conditions you'll find in most fire truck loan contracts. They are due to the nature of fire trucks and the rules surrounding fire truck financing.

Most departments don't know what they are committing themselves when they sign financing contracts. And it can hurt them later on.

5. It's expensive. Interest costs can reach up to 50 percent of the total cost of a truck. I've talked with departments who have spent hundreds of man-hours and months on the chassis yet try to spend only minutes on their financing offers.

Here's why it's not simple: The chassis cost and borrowing cost can equal the same amount. Often, the borrowing cost is more than any single component on the truck.

But if you're not experienced in understanding the borrowing cost concept, it seems very complex.

It's natural to want things to be simple — but this is not the case in this instance, and it requires effort to understand the complexities involved.

Because of these five reasons above, fire truck financing is something that just can't be boiled down into simple soundbites — no matter how hard someone tries.

And when you fail the effort to understand how these items affect you, you could waste more $10,000. That is the average amount that we see wasted in every fire truck financing deal — even those with the "best rate and no fees."

 

About the author

John R. Hill is an apparatus budgeting consultant for First Bankers, which helps fire departments avoid common financial mistakes that are made in the apparatus purchasing process. John also writes a weekly Web site column on FireFinanceGuy.com.

 

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