Some equipment leasing companies ask for a large deposit (sometimes several thousand dollars) before getting you approved for financing.
Then if you don't get approved they keep the money.
When they are called out on it, they will claim that they put so much effort into the deal and they need to be compensated for their efforts.
OK, equipment finance is not exactly like launching the space shuttle....
...it's common in the industry to ask you to prepay document fees (a few hundred bucks) before putting you into underwriting.
That's so that credit departments don't waste 5 or more hours on you unless you're totally serious.
Legit companies pretty much NEVER keep that money if the deal goes south.
You also shouldn't need to work with people who are so dumb they don't know what can or can not go through, right?
3. Bait and Switch, part 1 - Fake Low Rates
Imagine Googling something like "construction equipment finance."
Did you see an ad that says "rates as low as 5%?"
Then you go to the website and it asks you to fill out a form to get your quote.
This is not the company to work with.
First, let's call BS on the 5% rate.
Very few qualify for those rates.
That's usually for companies buying new equipment, from a dealer (who is going to offer them zero percent financing a lot of the time) who have perfect credit, time in business, and big, big revenues.
Second, and this gets a little geeky, but that 5% rate is not like the rate for your home loan, which is usually called an "APR."
Equipment finance agreements are quoted in payments, not rates, and will almost never include a "rate" because they don't amortize like a loan. Since it is not amortized like a loan, you're being quoted "simple interest" as opposed to an APR.
What's the difference?
If I am buying a $40,000 tractor, and I am quoted $825 as my monthly payment for 5 years, to compute simple interest:
If I pay my first and last payment up front, I am really financing $38,350 for 58 months. So, to borrow $38,350 I am paying, over 58 months, a total of ($825 X 58) = 47,850. My total finance charges are $47,850 - $38,350 = $9,500, for $164 a month in finance payments - $1,965 annualized. That comes out to around 5.1% simple interest.
However, if I compute it like a loan that is amortizing (which is how you, the consumer, assumes the rate is being calculated) I have to pull out a financial calculator, and when I enter the numbers, the rate on an "APR" is actually 9.6%, as opposed to 5.1% - that's a big difference!
Someone has used an online calculator to try to determine how much equipment they can afford. Their budget for the equipment is around $1,000 per month, so based on the calculator they go out and shop or bid on equipment that costs around $45,000.
Once they find their equipment and commit to buying it (often for an upcoming job or contract that they have bid on in anticipation of acquiring the equipment) and we find that based on their credit or other profile the payment will be $1,400 - meaning they can afford equipment that costs about $32,000 as opposed to the $45,000.
Now you have two choices: pony up the $1,400 - which is really more than you can afford, or start the shopping process all over again - which means risking losing that great contract you are either bidding on or just won.
This is a horrible way for equipment finance companies to do business, and it goes without saying that you should avoid working with companies with fraudulent equipment leasing calculators on their websites.
5. Changing the Contract
The first 4 tactics we talked about were scummy, but not illegal.
There have been numerous reports in recent years of equipment leasing companies offering a $1 purchase option (meaning after you've made all the payments, you own the equipment for $1, or sometimes for $100) and then sending back the contract with a 10% or FMV option and hoping you won't notice (meaning, at the end of the term, in order to retain the equipment you have to pony up a check for 10% or more of the original loan amount...)
There are software tools where you can upload the original document and then upload the document you receive back to detect any contract changes. Here are a few solutions:
Diffdoc - available at download.com - free trial version is available, costs $399 to buy.
Workshare Professional - available at www.workshare.com - free trial available, costs $175 to buy
Groupdocs.com is an online tool that allows you to upload the original contract and compare it to what you get sent back, free trial available, a subscription costs $17 per month.
Adobe Acrobat XI has file comparison functionality as well, $199.95 or $19.95 monthly.
Our recommendation: always check the contract that is sent back to you to see if it has been modified.
(...and don't work with a company that has tried to modify the contract after you signed it...)
If you're currently talking to an equipment leasing company that you think may be lying to you, we're happy to look at your stuff and tell you if they are being honest.
If they are legit, we'll tell you. If they aren't, we'll give you the real skinny.