Mike G thought things were breaking his way when heard he could own a truck with no down payment. His credit score suffered some nasty hits in recent years, and he was delighted to find out that lease-purchase trucking didn't require any credit check.
While the truck belonged to the company during the lease period, he'll pay for fuel, tires, PM inspections, repairs, and other expenses.
The Lease-Purchase Trucking Promise
Here are some highlights of Mike's lease-purchase deal:
- No down payment
- No credit check
- Truck payments of $400 per week for 4 years
- No balloon payment at the end
- 2015-2017 Freightliner Cascadia with less than 550,000 miles
- 75% of revenue and 100% of fuel surcharge, averaging $1.97 per mile
- Escrow deductions of $62.50 for 40 weeks ($2,500)
- Highway Use Taxes (HUT) are prepaid by the carrier and charged back through weekly payments
- Trailer rental of $185 per week with 1st 30 days free
- Can purchase tires and truck parts through the carrier for discounted prices
- Fuel discounts through the carrier's network
Mike figured that he could realistically expect to average 2,500 miles per week.
2,500 X 1.97 = $4,925 per week
Minus weekly expenses:
Fuel @ 6 mpg = 417 gallons per week X $3.50 per gallon = $1,459.50
400 (truck payment) + 185 (trailer rental) + 62.50 (escrow) + 1,459.50 (fuel costs) = $2,107
Weekly earnings are:
4,925 - 2,107 = $2,818
If Mike takes 2 weeks off per year, his earnings are:
2,782 X 50 = $140,900
He hasn't yet figured in the cost of tires, maintenance costs, taxes, and other operating expenses.
Since Mike has never had to pay these things before, he uses the yearly figures in the Owner-Operator Independent Drivers Association (OOIDA) Lease Purchase Calculator.
- Repairs $ 6,272
- Tractor tires $ 2,198
- Qualcomm $ 1,374
- Highway taxes $ 1,864
- Lumper fees $ 1,617
- Licenses $ 1,753
- Insurance $ 6,692
- Indirect costs $14,885
- Permits $ 579
- Truck wash $ 671
- Fines/tickets $ 300
- Total $38,205
When Mike was a house framing contractor, he learned that adding 10% to your expense budget is a good idea.
$38,205 X 1.1 = $42,025.50
Mike's annual gross income is:
$140,900 - $42,025.50 = $98,874.50
That's before income taxes. The tax calculations are too complex for us to get into here. We're only trying to show how the promise of lease-purchase trucking can lure in so many drivers like Mike.
How Does Lease Purchase Trucking Work?
This is different from being an owner-operator and leasing on with a carrier. If you're an owner-op, the truck title is in your name. You lease your business to the carrier and run under their authority.
But with lease-purchase trucking, you go into a lease-to-own agreement with a carrier. The company owns the truck. You make weekly lease payments.
Some lease-purchase trucking programs are structured so that you own the truck at the end of the leasing period. Others have a balloon payment at the end.
Other lease-purchase trucking companies have a trial leasing period, such as one year. You can sign on to a lease-to-own or return the truck to the carrier when the trial lease is over. Of course, if you return it, you lose all equity.
A lot of lease-purchase trucking programs offer incentives like no down payment and no credit check. This can tempt company drivers who want to become owner-operators, but don't have good credit or a lot of money to start a trucking business.
How Do You Get Paid?
The carrier might pay according to:
- Percentage of revenue
- Flat per-mile rate
- Variable-rate, according to freight market or type of goods you haul
- Another method you agree to
In most lease-purchase programs, the company pays you a settlement after they've collected the truck payment and fees.
But there's no guarantee that you'll bring in enough revenue to cover your expenses. This is why so many lease-purchase operators go broke.
Costs of Lease-Purchase Trucking
Besides weekly truck payments, you could be responsible for other payments such as:
- Tire fees
- Mileage fees
- Excess mileage fees
- Insurance
- Taxes
You may also be required to keep an escrow account for repairs, tires, and other expenses.
Other Lease-Purchase Trucking Costs and Penalties
When you sign a lease-purchase trucking agreement, you enter into a legal contract. That means you’ll pay penalties if you can’t stay with it.
A lot of drivers say that many weeks they didn't earn enough to cover the truck payment. Penalties for missed payments can be high.
Be sure you know when the contract considers the lease in default. Some agreements state the lease is in default after missing one payment.
Understand the Lease Agreement
The federal Truth-in-Leasing Law requires carriers to include specific items in the lease contract. You'll want to pay especially close attention to the sections of the contract that cover how you will get paid and what your deductions will be.
- The specific time frame of the contract -- when it begins and when it ends
- How the driver is paid -- per mile, percent of revenue, etc.
- Pay period -- no more than 15 days after proof of delivery (POD)
- Chargebacks -- things the carrier pays for initially but charges them to the driver
- Escrow of funds
- How the carrier accounts for funds
- Interest paid on funds
- Conditions for returning funds at the end of the lease
See CFR 49.5, Section 376.12 for complete details of what must be in the contract - anything less is a violation of the law. The lease-purchase trucking contract is long and full of legal jargon. It would be a good idea to have an attorney look it over before you sign.
You can also contact the Owner-Operator Independent Driver Association (OOIDA) for help understanding the contract. "If anybody out there is thinking about doing this, please call OOIDA and send us your contract and let us look at it" OOIDA president Lewie Pugh said. "We will tell you about everything in there -- the good, the bad, and the ugly."
The Hard Truth About Lease-Purchase Trucking
We've said it before -- drivers should build up a large cash supply before getting into the owner-op game. Lease-purchase trucking looks like a good way to become an owner-operator without good credit and a lot of startup capital.
But unfortunately, lease purchasing companies don't always set you up for success. Here are some of the complaints we've heard many times:
- The truck constantly needs repairs
- Maintenance downtime
- Reduction of available freight
- Going without a paycheck
- Going into debt with the company
- Paying more than the truck is worth
Walkaway Lease
Some lease-purchase companies offer a walkaway option. You can get out of the lease if things aren't working out. The terms allow you to give notice, such as two weeks, that you intend to walk away.
Although this gives you an escape hatch, you might still take a beating.
- You lose your equity in the truck
- It can have a bearing on your credit rating
- You still need to pay any debt you owe to the company
Some walkaway contracts also allow the carrier to terminate with notice. The risk here is that you could lose equity in the truck at any time.
Lease-Purchase or Fleece-Purchase?
In a Truth About Trucking survey from 2009-2011, 39.2% of lease-purchase truckers were told that they could make more than $100,000 in gross revenues. Almost as many were promised that they could make $66,000 to $100,000.
But only 18% of lease-purchase operators made over $100,000, while 3% made $66,000 to $100,000. 73% made $35,000 to $45,000 with a lease-purchase trucking company. Keep in mind that these are gross revenues. After operating expenses and taxes, they take home much less.
The survey revealed that only 6% of drivers thought their no-money-down, no-credit-check lease program was a good offer. 72% saw it as a scam.
The survey uncovered many troubling things about the lease-purchase trucking experience:
- 73% had an expensive mechanical failure in the first 3 months
- Almost 60% felt that the company had little or no interest in their success
- 36.4% couldn't choose their truck -- the carrier chose it for them
- Almost all drivers were promised 2,500 miles or more per week, but 78% averaged fewer
Lewie Pugh warns of predatory practices that run rampant among lease-purchase trucking companies.
"There's so much misleading stuff out there", Pugh says. "The first thing we should be saying about this is if you don't have money and you don=t have capital and you don't have credit, you shouldn't even be getting into the trucking business."
Final Thoughts
Lewie Pugh says, "[T]here's nothing but sketchy out there" in lease-purchase trucking.
Drivers get into the owner-op game to make a good living, not to go broke. The best way to succeed is to buy a reliable truck and have a lot of cash reserves.
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