Cost of Financing vs. Cost of Waiting Explained
In an attempt to be conservative, the governing bodies of many departments have not considered financing as an option to update fleets in order to avoid the cost of interest on a loan. Few recognize, however, that there are other costs (costs of waiting) to be considered. There are at least three other cost components to a decision on when to purchase new trucks.
1. Inflation on New Trucks – Between raw materials costs and changes in regulations, the price of new trucks has been increasing each year. The percentage increase is up for debate, but most would put it somewhere between 6% and 8%. Even at 6%, inflation costs that are encountered from waiting, are more than interest costs at current rates.
2. Maintenance Expenses on Older Trucks – Maintenance costs increase as trucks age. In the initial stage (years 0-5), warranty covers the cost of most repairs. In the second stage (years 5-7), the warranty period ends but the trucks are not prone to large repairs in most cases. Then sometime at or around the seventh year, larger repairs begin to emerge outside of the warranty period.
3. Trade In Values – While in many cases existing trucks are not disposed of but retained in a reserve capacity or utilized somewhere else in the fleet, when they are sold or traded the value declines the longer the truck is kept.
Summary: So, there is a cost to finance and also costs associated with waiting. Interest costs are acceptable or even preferable if this cost allows you to avoid larger costs from inflation, maintenance and/or changes in trade in values. Interest rates are still at historical lows.