Replies

1. 
   frenchy | Nov 28, 2006 02:57am | #1

   madmadscientist.

         I worked for Caterpillar for 7 1/2 years and wrote a lot of those rental agrrements whereby the rent applied towards purchase.  I'd guess I wrote nearly 1500 in that period.. *

     The prime advantage of a rental to purchase agreement is that you don't need to come up with a down payment.  your first six months of rent provides that.

        The disadvantage is that you are paying a higher interest rate than you would if you came up with the downpayment right from the get go..

     For example I used to write them whereby 100% of the rent went towards the purchase less 3% per month on the unpaid balance.  Three percent works out to be well in excess of 18%compound  APR! whereas if you have the downpayment in todays market it's easy to get prime or below prime rates (around 8% simple ) 

    Once you convert from rent to a lease if your credit is good they will usually write the contract at near prime rates..

        Be carefull with who you do business with.   Many Cat dealers sell their contracts once written and what then happens is you are dealing with a bank who has no interest in you or any problems that come up.   All they want to do is collect their money on time..  They can be rather brutal if something happens and say you don't get paid by a contractor. Not all do but once the contract is handled by a bank you really need to make sure payments always go out prior to the due date so late fees etc. won't get added on..

     The same applies if you use Cat financing.. They are a bank,  they really have no flexibility if things happen..

      Be doubly carefull if they sell you a tax affected lease.. if you are late on your payment or need to renegotiate. you are suddenly in penatalty heaven.. The best leases have no prepayment penalties.

    I now work for Ingersol Rand,  I try to discourage people from taking the low interest rates the factory offers.. Prepayment penalties and lettle flexibility dealing with late payments etc.  makes the couple of points lower interest rates really pretty moot overall.  That plus I only charge 1% per month on the unpaid balance with the first 30 days interest free.. It winds up being  12% APR simple .   Our conversion is also a lot more flexible.

     A couple of more points.. First a rental is just that, a rental.. if something happens no matter how much rent you've paid you are required to make monthly payments or risk losing the equipment (and the tens of thousands of dollars you may have paid.. whereas a lease/ payment  has a little more flexibility.

    Second

            Most rental agreements are for 4 weeks/28 days!

     That means you will make 13 payments per year on a rental whereas a lease you only make 12 payments..

      Third,

         Any maintinance on the equipment during the rental period is added to the cost of the equipment.

     fourth,

          If the payemts were set at below market rates it's possible to be either upside down or just at it's currant market value..

     fifth,

         Rental is a really neat way to make sure that the equipment you've selected is a good fit.. far better to give up a month or two of paid rent than wind up with a problem.  If the equipment is good and worth it's payments the lease should be  lower than the rent.  so your overhead is reduced..  It's far scarier to simply buy a piece of equipment and hope everything works as you planned it..

     In the end that's your tradeoff.. lower monthy interest rates if you buy the equipment outright and come up with the down payment. or more flexibility if you start out renting it before you actaully purchase it..

     Any further question? 

     So which piece of equipment are you thinking of buying?

    

     

        

       

    

    

1. 
   madmadscientist | Nov 28, 2006 04:00am | #3

   Hi Frenchy,

   Wow thanks for the great bit of info.  I'm not looking at getting a CAT product I am looking into why people are not doing the RTO agreement as much as they used to.Daniel Neuman

   Oakland CA

   Crazy Home Owner

1. 
   intrepidcat | Nov 28, 2006 04:27am | #4

   Sounds like they started reading the contract?

    

    

    "Being a cowboy aint all ridin and shootin" - Tim Mooney 

1. 
   frenchy | Nov 28, 2006 05:44pm | #6

   intredpidcat,

    Not all rental purchase options are bad deals.  When I worked at Cat and was forced to use their system it was a bad deal.  It didn't matter if it was a Cat or a Lull. Once I wrote my own rental purchase agreements I made sure the deal was fair for everyone.

       The differance is the method the rental purchase agreement is written.. For example most of the rental (United, RSC etc. )  companies write rental agreements that basically screw the user. If you buy it very little of the rent actually applies towards purchase. Deals where only 80% applies or time limited etc..  Dealers on the other hand tend to be a little more fair since their real intention is to sell equipment and only rent it as method to have lower priced units on hand. 

     If you are just starting out with little money and a need for a lot of equipment a rental purchase agreement may be the only way that you can afford to get what you need..

        Not all rental purchase agreements are for new equipment.  Doing a rental purchase on a used piece is probably the smartest way to ensure that you have a good one..

2. 
   frenchy | Nov 28, 2006 05:36pm | #5

   madmadscientist,

     I'm sorry it's not as simple as that, The reason for the decline in rental purchase agreements has more to do with the currant market than anything else..

     In todays shaky market it's rare to attract a total newbie. That would take a monumental amount of courage to get into a business when thousands of people are getting out of it.. In addition since a lot of people are getting out of the business they are selling off their equipment for whatever they can get. There is an abundance of good used equipment out there and those contractors with jobs can buy from private individuals at deeply discounted prices..

    However with those deep discounts comes the need for the buying contractor to obtain his own financing. Banks and private sellers are not willing to write rental purchase options.

2. 
   dieselpig | Nov 28, 2006 03:31am | #2

   I believe Frenchy has effectively solved the mystery on this one.

   I was in a Rental/Purchase agreement with Caterpillar for all of about a month when I first bought my telehandler.  As soon as I got the paperwork and sat down and did the math, I got out of that deal as fast as I could.  When I did, my payments went from about $2500/mo to $1700 month and my APR dropped about 12%!!!!

   It's a good deal if you're on really shaky ground and not sure whether you'll be able to hold up your end of the bargain.  But if there's even an outside chance that you'll be able to carry the payments full term, then bite the bullet and buy it outright.

   The reason I got roped in is a long story.  It has a lot to do with the way Cat does business around here and the very convoluted way the rental/purchase agreement is explained by the salesman.  It's pretty shady if you ask me.  And I don't have the slightest problem telling you that I believe they're banking on the fact that anyone looking into this sort of deal will be so happy that they have a big shiny yellow toy that they won't bother sitting down and figuring out where all that money is going.  It certainly ain't going towards the principle, I can tell you that much.

   I never had any intention of dong a 'rent to own' deal on a piece of heavy equipment.  But the way the salesman "sold" this arrangement to me made it sound like a no brainer.  Cheap insurance.  Not everything is as it appears, come to find out.

   View Image
1. 
   frenchy | Nov 28, 2006 05:48pm | #7

   dieselpig,

    rent to own isn't always a bad deal for the contractor, it really depends on who wrote the deal and who's doing the buying..

     I write a lot of rental purchase agreements on used equipment.  Rent to own ensures that you have a good one and not one prone to maintinance.  If after a few months you find the dealer is out too often you simply go looking for another.  I'd rather lose a few months rent than be stuck with a lemon.

1. 
   dieselpig | Nov 29, 2006 01:11am | #8

   Sure, I can see the benefit in that Frenchy.  But for me, buying one piece of equipment, with no problem making a down payment, and believing, in good faith, that I'll fullfill my end of the loan..... it was a bad deal.  Not a good long term solution to equipment financing at all.View Image

1. 
   frenchy | Nov 29, 2006 08:25am | #10

   dieselpig,

    I understand,  especially when you consider Cat's approach to rental purchase programs.

     The sad thing is they also write great rental agreements as well.  Depending on the customer you might be able to rent far cheaper than you can buy, far cheaper in every sense of the word!

     It depends on how they look at your business. If you are a target account determined by many things such as being a industry leader or in a extremely visable industry dominated by competition such as John Deere or Ingersol Rand they will give you a deal too good to pass up..

    Caterpillar more than any other company is perfectly willing to select target accounts, write an impossible to beat deal and in effect buy the business.. It's the untalked about portion of the business. Small guys like yourself wind up paying retail for one or two pieces while the big boys pay a  fraction of the same price..

     I've even seen deals whereby all maintinace is free and they even guarentee availability with extra stand by equipment.all at lower rental rates than you could even dream about..

    

3. 
   HammerHarry | Nov 29, 2006 01:51am | #9

   Some industries will rent because rental is an operations/maintenance discretionary budget item, whereas a purchase is a capital expense that has to be approved by various layers of management.

    

    

1. 
   frenchy | Nov 29, 2006 08:30am | #11

   HammerHarry,

    The reason some of those provisons are written in may not be  for cost control. Instead someone in management excercises the purchase option at completetion of rental term..

     I've done a few of them whereby somebody from the company "bought" the piece for 10% of it's currant market value at termination of the rental period..

   Even if they turned and sold it at auction and it was a slow auction  they stood to make tens of thousands of dollars..