By John Hill
First Bankers
You’re finally getting that new fire truck. And, because of the budget demands, you’ll finance it — perhaps for the first time.
You are immediately inundated with several financing options with similar sounding names. You’ll hear lease, lease purchase, walk-away lease, or turn-in lease.
While they sound similar, they are dramatically different financial options with differing responsibilities and considerations. Each of these options work well for certain situations. But they work very poorly when the wrong option is used.
Lease purchase
The most common financing option is a lease or, more accurately, a lease-purchase agreement. This option is used to finance more than 95 percent of all fire trucks.
This type of agreement is very similar to a loan. You make payments and own the truck after completing the payment schedule. You don’t have to pay any buyout fees or payments at the end. The truck is usually titled in the department’s name from the beginning.
This type of agreement qualifies for low, tax-exempt interest rates and terms are usually three to 15 years. Payments can be made monthly, quarterly, twice a year or once a year. Most departments place a down payment to lower their cost, but a down payment is usually not necessary.
The reason this option is called a lease purchase rather than a loan is that you have the choice each year to cancel the agreement. By having this choice, most states consider this financing option an operating expense and it does not count toward any debt limits. However, when you choose to cancel the agreement, you return the truck to the bank.
This option works well for departments that want to own the truck longer than the financing period. For example, financing a truck will serve the department for 15 or 20 years and it is paid off in 10 years.
Typical terms are similar to a loan in that you are responsible to insure the truck and keep it in good working order with normal wear and tear. You can usually pay off the lease early without financial penalties.
This is the most straightforward financing option.
Walk-away lease
A walk-away lease is more complex. It allows you to use the truck for five or seven years while making payments. It is not necessarily designed for you to own the truck; rather, it is designed to allow you the use of the truck for a set period of time at a set payment.
At the end of the term, you have the option to return or walk-away from the payment and truck, purchase the truck for a set amount, or continue making payments until it is paid off.
If you walk-away, you are responsible for the maintenance, repair and condition of the truck according to the terms agreed upfront. You will usually be liable for any costs to bring the truck up to condition.
While this option is offered on a tax-exempt interest rate, there have been no rulings to date to confirm that this actually qualifies according to IRS rules.
Turn-in lease
The turn-in lease is similar to a walk-away lease with a couple of important differences. Like the walk-away lease, this option is designed to allow use rather than ownership of the truck.
The difference comes at the end of the financing term, usually five or seven years. At that point, your choice is either to turn in the truck to the manufacturer and receive a new truck or purchase the truck for set amount, which was agreed upon upfront.
When you turn in the truck, you are responsible for the repair, maintenance and condition of the truck and may pay costs to bring the truck up to spec. You also are required to purchase a new replacement truck from the same manufacturer.
A turn-in or walk-away lease is perfect for departments that:
- Have a formal replacement program in place with a five- or seven-year rotation.
- Have the budget discipline to be financially prepared to purchase a new truck every five or seven years.
- Are OK with the concept that they never really own the truck.
- Have a maintenance program that will care for the trucks according to the operating requirements (including mileage and pump hours).
- Are not concerned that they can afford to buy or will qualify to borrow money on the used truck if they decide to buy rather than walk away or turn in.
- In the case of the turn-in lease, they are certain they will continue to buy from the same manufacturer in the future.
Each financing option has its pros and cons. It’s important to ensure the financing option fits your vision and use of the truck over its useful life for your department. Done right, each option will work wonderfully. Done wrong, it will become a nightmare.
The key is to understand your goals for the truck and the details of each option to fit your department.