A bad credit rating can make it extremely challenging to find financing of any kind. And loans for purchasing a commercial truck are generally sizable, meaning you’ll need to get creative in the types of commercial truck financing you seek.
Learn your options for purchasing a truck despite bad credit, top loan considerations and tips for improving your credit score to make purchases simpler.
What Is Commercial Truck Financing?
Semi-truck financing works a lot like financing a personal vehicle. You’ll purchase the truck with a down payment and the lender will hold the title of the truck as collateral until you pay off the loan.
You’ll make monthly payments to your lender for the set period outlined in the loan agreement. If you default on payments or don’t meet your financial obligation, the lender will take possession of the truck.
What Is the Commercial Truck Financing Process?
The process starts with you applying for financing. In the application, most lenders ask for the following documents.
- Financial statements from the preceding 3 years
- Business owner financial statements
- Proof of a commercial driver’s license
- Proof of commercial truck insurance
The lender will use this information to determine how risky you are to lend money to through a full credit review. Another factor that will play a role in whether you receive financing will be how many years you’ve been in business. Lenders are often cautious with new businesses that are not yet established.
What Is the Standard Interest Rate for Commercial Trucks?
Common commercial truck financing rates range from 5-30%. Rates vary immensely based on various factors. For example, you might be able to obtain commercial truck financing 0 down but pay a higher interest rate because 0-down loans are higher risk for the lender.
You might also experience higher rates if your credit score is poor. Once again, this is another sign for the lender that you are a risky borrower, which means you’ll need to pay more for the lender to take on the risk.
Used trucks also tend to have higher interest rates than new trucks since new trucks are less likely to experience mechanical problems and provide a more stable resale value in case the lender repossesses the truck.
Typical Credit Score Requirements
To qualify for a standard loan, you’ll need a credit score of at least 600. However, some lenders require scores of 650 or higher. Before getting too far into the credit application, ask the lender for specific details on their credit score requirements to save time, especially if your credit score barely meets the minimum 600 requirement.
Types of Loans To Look for When You Have Bad Credit
Owner-operators and trucking companies with bad credit have limited options for commercial truck financing. Look into these options if you aren’t succeeding with finding a standard loan.
Dealership and Private Parties
Banks might not be the best place to go for your loan when your credit score is far from ideal. Instead, talk to the dealership or a private lender about your options. The dealership might have special offers or promotions that offer interest-free or low-interest financing to get you started for your first few months.
Private parties also have more flexibility than banks do. Talk to lenders specific to the industry who understand some of the financial ebbs and flows that you experience and why your credit might not be ideal.
Title Loans
When you apply for a title loan, lenders often don’t look at your credit score when determining whether you qualify for the loan. Title loans are also more flexible in the amount of financing you can get.
If you own multiple trucks, this can be an ideal option for adding to your fleet. You’ll use one of the trucks you own outright as collateral. You’ll sign over the title to the loan company who will then lend you a certain percentage of the truck’s total value.
If you fail to make payments to the loan company as agreed upon, the truck whose title you used as collateral for your loan will become the property of the loan company. You should be confident in your ability to make the payments or using this option could disrupt your trucking business significantly. You should use a commercial truck financing calculator to review your payments before signing over your truck’s title to purchase another truck.
Operating Capital
If you can’t get a loan to finance your truck, you might instead be able to obtain an operating capital loan to cover your necessary expenses while applying money to big purchases.
Operating capital covers ordinary expenses, such as rent and payroll. This can help you if you undergo a period of reduced work capacity due to truck issues or delays in getting your truck financed so you can keep moving loads.
One thing to keep in mind when applying for operating capital loans is that these loans go against the business owner’s personal credit most of the time. That means that they could impact your personal credit score.
Repair Financing
If you’re unable to get financing for a new or used truck purchase, you might instead consider repair financing for upkeep on the trucks you do have. Some lenders will create repair financing agreements specifically designed for vehicle upkeep.
When shopping for repair financing, be sure you know the following terms before signing on the line for the loan.
- Principal
- Fees
- Interest rate
- Annual percentage rate (APR)
- Repayment term
Additionally, ensure your truck still has plenty of life in it before deciding to move forward with repairing it. You don’t want to get into a money pit situation where you have to keep dumping more money into the vehicle to keep it running.
Lease Purchase Buy-Outs and Loan Refinancing
Lease purchase buy-outs allow you to purchase the truck you’ve been leasing based on its market value and current market demands. Normally, you cannot negotiate the pricing.
You’ll still need a loan to finance your lease purchase buyout, but it might be easier to get if you paid your lease payments on time and improved your credit during the lease term. Lease purchase loans are generally financed for 36 to 72 months.
Additionally, you might look at refinancing existing truck loans at better rates to free up space in your budget to add to your fleet. Refinancing allows you to stretch out payments over a few more months to lower monthly payments. And a lower interest rate means less money in interest for the remainder of your loan.
What to Consider When Applying for a Loan
Before you apply for a commercial truck loan, review these top considerations to ensure you’re agreeing to fair terms. Otherwise, it makes sense to keep looking for other lenders willing to work with your commercial truck financing bad credit.
Interest Rates
Trucking companies and owner-operators with bad credit often pay higher interest rates. You might consider leasing a truck to work on your credit for a few years and then re-evaluating a purchase at the end of your lease. High interest rates can make loan payments unaffordable or could mean that you pay far more for your truck than you should.
Down Payments
To decrease your lender’s risk, they will often require that you make a larger down payment to provide you a loan. Be careful you don’t spend so much on your down payment that you have issues with cash flow to cover other expenses.
Inventory Options
You’ll have far more financing options the higher your credit is. So with bad credit, you might only be able to choose between a couple of lenders. And if your loan is for a limited amount, you might struggle to find a truck in that price range, which means you might not get the manufacturer you originally wanted.
3 Quick Tips to Boost Your Credit
As you look for ways to finance a commercial truck with your existing bad credit score, you might be realizing the better option is to focus on improving your credit score over the next few months to prepare for your upcoming purchase. Here are three of the most impactful ways to boost your credit.
Pay Off Revolving Balances
When you have multiple outstanding lines of credit, lenders get a little nervous about allowing you to take on another. Look for ways you can pay off revolving balances on credit cards or other loans to show you’re ready for a new loan and trustworthy with the lines of credit you have.
Check Your Credit Report
Mistakes on your credit report could be pulling your credit score down unfairly. You have a responsibility to check your credit report regularly to look for mistakes and flag them. This can also help you detect fraud early to prevent large asset losses.
Increase Your Credit Limit
Increasing your credit card’s limit can have a positive impact on your credit utilization rate, which is a factor in your credit rating. The lower your credit limit utilization, the better your credit score will be, which can mean better loan rates and higher quality lenders.
Build Your Trucking Business Despite Bad Credit
From starting with a truck lease to taking a few months to work on your credit score, you have many options when you need commercial truck financing despite challenges with your credit rating. Start planning for your next truck by using these tips.
