How to negotiate the farm finance minefield
Published 27/07/2016 | 02:30
Scarcely a week goes by that I do not receive a call from a farmer client enquiring how best to finance a new piece of equipment or possibly a new motor car.
Many farm machinery and motor dealers offer finance deals and the choices can be bewildering ranging from personal loans to lease finance to Hire Purchase or Personal Contract Plans (PCPs).
Unfortunately banks will rarely provide personal loans for such purposes and will refer the client to their finance representative who typically will be a very personable individual, an excellent salesperson and frequently a current or former sports star.
I'm not suggesting for one second that these people are not honest and professional but I am cautioning people not to be blinded by their celebrity status and to focus on how much the finance is costing rather than who is going to win next Sunday's match.
The cost of finance can vary widely. A quick scan of the internet yielded up deals ranging from 2pc to 8pc interest rate (APR) per annum. Such a difference amounts to €9,000 on a €60,000 tractor financed over five years.
Finance Leases and hire purchase
Generally, hire purchase (HP) or lease finance agreements are really the only two options available in regard to financing farm machinery. The main features of these types of finance are as follows;
The asset being financed will satisfy the security requirements
The Interest rate is always fixed and will not change during the life of the loan.
The interest is applied on a simple interest basis, ie, you pay interest on the entire sum borrowed for each year of the agreement which will make the rate look much lower but the true rate (APR) will be much higher.
Because all of the interest is applied at the outset an early termination of the agreement may prove costly
While the machine may be registered in your name you won't actually own it until the term of the finance has expired and all payment have been made.
Finance Leases differ from Hire Purchase in a number of ways:
Lease agreements will not end at the end of the primary repayment term. You will be given an option to continue with a secondary lease or you can buy out the item. Either option will generally involve additional cost.
Lease payments are fully allowable against income tax whereby the entire cost is written off over the primary term of the lease. However, the end of the lease will trigger a clawback of relief equivalent to the deemed market value of the item at that time. Entering into a secondary lease period will defer this problem but generally at an annual cost.
Items financed on hire purchase are written off against income tax at 12.5pc per annum and there are no complications at the end of the term.
Where items financed on hire purchase are traded in for an amount that represents a profit on its value for tax purposes, this profit can be rolled over on to the replacement item. Such a concession does not apply to disposals of leased items.
Finance Check List
Establish what the true rate of interest on the finance agreement is and ideally consult your accountant.
Query if there is an arrangement or termination fee and how much it is.
In the case of lease agreements, query the terms applicable at the end of the primary lease period.
Avoid early terminations as these will cost you.
Be aware of penalties for missed payments.
Have your accountant cast his/her eye over the terms of the agreement before you sign it.
In the case of a lease agreement, the machine/car can be seized at any time during the course of the agreement if you miss your payments.
The lender must first warn you of this in writing.
If you are buying on hire purchase, the lender must obtain a Court Order to repossess the machine/car if you have already paid more than one-third of the total hire purchase price.
The total hire purchase price includes any deposit you have paid as well as the instalments due under the agreement.
It is worthwhile checking the registration documents of a second-hand vehicle to make sure that it is not already owned by a finance company.
If it is, the person trying to sell the vehicle does not actually own it and has no right to sell it to you.
Second hand vehicles can be checked out to establish if they are currently the subject of a finance agreement by contacting Hire Purchase Information Ltd, ICB House, Newstead, Clonskeagh Road, Dublin 14. Tel: 01 260 0905.
You can also get an answer by enquiring online at www.hpifirst.ie. An enquiry costs €10.
Before giving out a loan, lenders will check your credit rating with a credit rating agency, most likely the Irish Credit Bureau (ICB). Information from the credit rating agency will show your record in paying back any loans that you have taken out in the past with financial institutions who are registered with the ICB.
It will show lenders if you have failed to pay back any of your debts in full or if you have been slow with repayments. It will also show what loans you applied for.
Many banks, building societies, finance companies and some credit unions, are registered members of credit reference agencies.
This means that they can check the records from many different kinds of lenders.
When you enter into a credit agreement (such as taking out a loan) with a bank, building society, finance company or credit union that is a member of a credit rating agency, you agree that the lender may use the information you give them for the purposes of credit checking.
This is normally contained in the small print on the loan application form.
If you currently have loan or finance agreements in place or have had them in the past, your details will more than likely be held by the ICB and you are free to apply for a copy of your credit record.
An application form can be had from the ICB website which you can complete and submit with a payment of €6 to Irish Credit Bureau, Newstead, Clonskeagh Road, Dublin 14.
You can also apply directly from their website at www.icb.ie or phone them on (01) 260 0388. It should be noted that it is not possible for a member of the public to access information on another person.
Your credit report includes your name, date of birth, address(es) used by you in relation to financial transactions, the names of lenders and account numbers of loans you currently hold, or that were active within the last five years and repayments made or missed for each month on each loan.
It will also show the failure to clear off any loan and loans that were settled for less than you owed.
Details of where a lender took legal action against you will also be shown.
So, the ICB reflects a full picture of your credit history, good and/or bad.