Reduce debt or reduce repayments? Truck loan structure under the spotlight

The unexpected 14-day shutdown of the NSW construction sector as a result of the lockdown measures was undoubtedly a significant shock for the industry and its suppliers. This hiatus from work and earnings likely served as a wake-up call, especially for construction industry truck owners who were already grappling with the usual pressures of costs and income. The impact was potentially felt more acutely by smaller owner-operators and sole traders. Those who had stretched their truck finance arrangements or hadn't secured the most competitive deal might now be reaching out to their lenders for repayment assistance.

This situation underscores the critical importance of minimizing operational costs and expenditures to their lowest feasible levels and containing debt. For many truck owners, monthly loan repayments constitute the largest monthly expense for their business. Therefore, reducing the associated costs of truck loans is pivotal by securing the optimal loan deal.

However, there's another facet to this current predicament – debt reduction. Those who have paid off their loans and aren't burdened with monthly truck loan repayments are likely experiencing less stress than those still fulfilling scheduled repayments.

In light of the recent economic and operational landscape, we emphasize key considerations pertaining to the decision of debt reduction versus repayment reduction. Is it an either-or scenario, or can both objectives be pursued simultaneously?

Assessing the Costs of Truck Finance

Truck loan interest rates are the largest single cost component of a truck loan. After all, interest charged is the cost of borrowing. But that ‘large’ can be minimised through achieving a lower interest rate. The interest rate is the major driver of the overall cost of a loan. The higher the interest rate on the loan the higher the overall cost of the finance.

Additional fees and charges are part and parcel of setting up various types of financing. Lenders typically impose standard fees for initiating a loan, and some might also levy monthly service fees and other assorted charges. While a portion of these fees adheres to industry norms, there might be some supplementary charges that applicants can curtail by meticulously reviewing the contract details when presented with a loan quote.

Vigilant attention is imperative, particularly when contemplating dealer finance or loan propositions that seem exceptionally enticing at first glance. Dealer or manufacturer finance has become pervasive and is available at most points of truck purchase, be it new or used. These offers often accentuate the most favourable aspects of a loan deal, and this practice can sometimes obscure higher underlying costs.

Containing the overall costs of truck finance starts with having a lender such as Jade use their vast lender connections to source the best deal and use their skills to negotiate the cheapest truck loan interest rate on your behalf. With the cheapest rate secured the most significant component of the finance, the interest charges, can be kept to the minimum which can then deliver a lower repayment amount.

Loan Structure: reduce debt or reduce repayments?

The ongoing cycle of lockdowns and reopenings has prompted many business operators to reconsider their debt levels in order to fortify their positions against potential future impacts. If you found yourself in a situation of income loss due to shutdowns, managing the challenge might have been somewhat less daunting if you had already settled your truck loan or had managed to secure the lowest possible truck loan repayments.

This highlights a crucial decision when embarking on a new truck loan: whether to opt for lower monthly repayments or to choose higher repayments to expedite becoming debt-free.

This decision hinges on the loan's structure, particularly its term. Longer loan terms translate to lower repayments, while shorter terms result in higher repayments—assuming the loan amount, interest rate, and residual value remain constant.

For businesses with cash flow as their primary concern, lower monthly repayments might be the preferred choice. However, businesses aiming to reduce debt more rapidly could favour higher repayments over a shorter term.

These are discussions that should be had with an accountant or financial advisor as they require an assessment of the longer term objectives of the business. But to see what we’re talking about, head to our Truck Loan Calculator. This handy loan tool allows you to vary all data inputs and instantly see how repayments change when the loan term is varied.

Indeed, the consideration of the residual amount is an important aspect of structuring a truck loan. The residual, often referred to as a balloon payment, represents a portion of the original loan amount, excluding interest, that is reserved for payment at the conclusion of the loan term. It's worth noting that certain lenders might impose limitations on allowable residual percentages.

However, what's crucial for operators to contemplate is the desired balance between the amount they wish to pay—or avoid paying—at the end of all monthly repayments. Opting for a higher residual amount can lead to reduced monthly repayments, but it also results in a larger outstanding debt at the end of the loan term. This decision should be assessed against the projected value of the truck at that point in the future. Striking a residual amount that surpasses the vehicle's anticipated value would not be a prudent business choice.

By having the finance experts at Jade Truck Loans, a trusted Truck Loan Broker - Commercial Leasing, handle your vehicle finance, you receive professional services in structuring your loan to specifically suit your requirements and work towards achieving your preferred objective – whether that's debt reduction or reduced repayments. Our seasoned consultants leverage their expertise to tailor financial solutions that align with your unique goals, ensuring your financing journey is optimized to the fullest.

Refinancing as an Option

If we have you rethinking and reviewing your existing finance deal and thinking, mmm, could I do better, then we could have an option for you. We handle truck loan refinancing to achieve a better finance arrangement for customers on their existing loans. Truck refinancing involves replacing that existing truck loan with an entirely new finance deal.

Absolutely, there can be expenses associated with various stages of the loan process, much like any other type of loan. Additionally, there might be costs linked to paying off your existing loan ahead of schedule. However, these factors and any other pertinent concerns will be thoroughly addressed, elucidated, and managed by your dedicated Jade consultant.

When the moment arrives to purchase your new truck and secure the necessary financing, it's essential to take a comprehensive view of all aspects involved. Leveraging the expertise of our finance professionals can prove invaluable in your pursuit of obtaining the most cost-effective truck loan that aligns with your goals and needs.

Contact Jade Truck Loans on 1300 000 003 for a quote on a truck loan.