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Smarter Finance USA Blog

What Are The Financing Rates For Used Farm Equipment?

Posted by Rob Misheloff

As a husband and father, the best example I can set in the world is by helping others. That’s why I’ve built my career around helping my fellow business owners grow their companies. My hope is that this website and my company help you to grow your business and achieve your goals.
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If you are looking to purchase used farm equipment, you can save considerable money compared to the cost of buying new. Depending on the brand and type of farm equipment, many pieces of machinery are built to last for 30 years or more, but buying used can save you 50% or more, particularly if you are buying machinery that is 10 or more years old.

The actual financing rates for used farm equipment depend on a lot of factors, such as your time in business, your personal credit and the price of the equipment you're buying.

You can sometimes get really good interest rates (5% per year or less APR) if you are buying directly from a dealer (such as from a John Deere dealer, for example), with two caveats: first you usually need very good credit and at least 2 years time in business, and second, most equipment financed with special rates through a dealership needs to be less than ten years old. If you meet those 2 criteria, and are buying from the dealership, you'd have to be certifiably insane to look elsewhere for financing. Neither we nor anyone else in the galaxy will provide you a better rate than that. (The dealer makes money enough money on the machinery to offset not turning a profit or even running a small loss on the financing side).

What Does It Cost To Lease Farm Machinery With Good Credit?

If you're not financing through a dealer, but you have stellar credit, significant time in business (2 years or more) and decent annual revenues ($500,000 or more), assuming the equipment is no more than ten years old, you can probably line up lower cost financing through your bank than with other sources. Typically rates at the bank are quoted as an APR of 6-8% annually, though the rates vary based on your bank and your situation.

Incidentally, it's possible you think we're nuts, since the first two places we told you to look for financing are not us, but that's ok. Quite honestly, if you're better off getting financed elsewhere, you're probably smart enough to figure that out, so why waste your time and ours unless it's likely we'll do some business together? Also, we are in business to help businesses like yours, so we're pretty interested in talking to the people who are good "fits" for what we have to offer- and not very interested in trying to talk people into something that might not be in their best interest.

Farm Equipment Financing if You're Not Getting Dealer or Bank Financing

If you're not using a bank or your dealer, you'll probably use a company like ours, an equipment leasing company. Equipment leasing companies usually offer two types of financing, an equipment loan (you make the payments for 2-5 years, and own the equipment at the end for a final payment of $1) and an equipment lease (you make the payments for 2-5 years, and at the end you can walk away or choose to purchase the equipment for a final payment of 10% of the original purchase price).

Equipment leasing companies are a good fit if one of the following is true:

  • You are new in business
  • You don't have perfect credit
  • You are buying equipment that is more than ten years old
  • You got turned down for bank financing and aren't going through the dealer

You may notice all the scenarios where an equipment leasing company is a better fit than the bank or the dealer qualify as sounding a little bit riskier for the finance company than the situations where it's an established company with great credit buying new equipment. That's because they are riskier, so the rates are significantly higher. How much higher goes from a little bit higher to quite a bit higher, depending on the situation.

What are the Rates for a Farm Equipment Loan?

If you ask someone at an equipment leasing company what the interest rates are to lease farm equipment, the party line is, "Well, technically, these aren't loans - they are leases, so they don't work off of an interest rate." Technically, that is true, but does it sound like kind of a bogus answer? That's because it is a bogus answer.

I asked someone at an equipment leasing company how they answered the question about rates, here was his answer, verbatim:

"So, yeah, we tell people there isn't an interest rate, but that usually doesn't fly. So, we kind of tell them the rates, but we use simple interest and take off the first and last payment when computing it so that it looks lower, so basically we lies our butts off."

Why all the dancing around? Because the interest rates are pretty high, and equipment leasing people are scared that if you figure out what the interest rate really is, you won't do business with them.

So, let's do some real numbers, for real. You can use the numbers we're going to give you to double-check the rates on any numbers we or any other finance company gives you to find out what the interest rate is.

Let's start with payments. Depending on your credit, here are sample payments per $25,000 financed, assuming a five-year loan where you own the equipment at the end for $1.

farm-equipment-financing-rates

First, notice that when computed as an APR (the way a bank would calculate a loan), the interest rates are much higher than when computed as simple interest. When you force an equipment leasing company to tell you an interest rate, 99% of the time they are going to quote your rates as simple interest. That way, you'll think the rates are lower than they actually are when comparing apples-to-apples versus bank or dealer financing.

Here's how to compute simple interest. We'll use the $590 payment on $25,000 for 5 years as an example.

  1. Multiply $590 by 60 to get the total payments. ($35,400)
  2. Minus the cost of the equipment ($35,400 - $25,000 = $10,400) - this is the total finance charges
  3. Divide the finance charges by the number of years you are financing for ($10,400/5 = $2,080 per year)
  4. Divide the yearly finance charge into the purchase price ($2,080/$25,000) = 8.3%

Converting into an APR is more complex, and needs a financial calculator or a spreadsheet and a finance geek, or, at least it used to be until Google came along and allowed you to figure stuff out pretty easy.

Want to convert your payment into an interest rate?

Just Go Here: http://www.calculator.net/interest-rate-calculator.html

Type your loan amount, number of years, and the payment and it spits out an interest rate.

Why are Farm Equipment Leasing Interest Rates So High?

I'm sure when I showed you what the interest rates really were, it was pretty shocking. While lying to you about the interest rates is pretty shady, believe it or not, charging these interest rates is totally reasonable (if it weren't, someone else would come along and make the interest rates a lot lower and get all the business... the rates quoted above are what is common on the market).

The simple fact is, lending money to finance used farming equipment to small businesses that can't get a bank loan is pretty darn risky. Some of the customers with good credit won't end up making all of their payments, and a lot of the customers with bad credit won't make all their payments. The lender has to charge borrowers enough in financing to cover the loans they lose money on, and hopefully make a profit too.

More importantly, the rates are going to be high whether we like it or not,  just like you and I would like to play basketball for the Lakers and make $20 million a year, but neither one of us is seven feet tall, so we lend money for equipment or grow food. Instead of worrying about what the interest rate is, let's worry about what the payment is, and based on what the payment is going to be, will you earn enough money after making that payment to justify buying the equipment?

If you buy some equipment, and your payment is $2,000 a month, but the equipment allows you to net an additional $5,000 a month, that's a pretty good deal, whether the interest rate is five percent or a billion percent. When we break it down, if you can't get cheap financing through a dealer or a bank, your choices are:

  • Pay a high interest rate to earn more money ($3,000 a month in your pocket, or whatever)

         -or-

  • Don't pay a high interest rate, don't acquire the equipment, and don't make more money

I'd bet you choose the high interest rate every time.

Also see:

How much does it Cost to Lease a Used Tractor?

 

 

If you'd like to get more information from us, including real numbers, even if the rates are going to sound "high", let's talk. You may either contact us or give us a call at (866) 631-9996.

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Topics: equipment leasing rates, farm equipment leasing

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