Financing a Tractor in 2023

Neil from Messick's here to talk to you today about equipment financing in 2023. A lot has changed here in today's financial environment. The cost of lending today is radically different in this year than it is in years past. We've done other videos talking about the different types of financing that are out there. We're going to cover some of those same topics again today, but we're going to do it in a way that guides you to maybe make a little bit different decision and guide your thought processes a little bit to make sure that if you're using financing in your equipment purchase, that it's working out the best for you. Today, we're going to cover the two different types of equipment financing that we see, and some of the caveats that you need to be aware of.
Now, while you see a rainbow of equipment behind me, let me be very clear that we're talking about some industry practices, and we're going to talk about them in a brand-agnostic kind of way. Don't look at a particular piece of machinery back here behind me and assume that I'm, say, talking about this excavator on, say, the financing details that we're about to discuss. These are industry practices, and I'm going to try to clue you into the things that let you be able to pick out which types of financing a particular vendor might be using. We're not talking about anything specific that happens to be behind me.
The first type of financing that we're going to discuss is what we will refer to as unsecured financing. Think of this as a lot like a credit card, that it's something where you've gone and bought something and the manufacturer of that product, the bank, does not have repossession rights to come back and take it if you happen to not pay your bills. It is, like I said, much like a credit card in that way. This is usually going to be the financing that tends to be used by a lot of the lawn and garden companies, or a lot of the smaller companies that we would see in this business. They're not going through and filing UCC registrations that give them the repossession rights over that piece of equipment. They're simply signing you up for a credit card in order to sell you their stuff.
Now, that type of financing has the most risk to the lender to it and so it is a fairly expensive financing product. Now, in the years gone by when fed rates were low and bank financing wasn't that expensive, that was a fairly typical financing offer for us to be able to have on lawn and garden equipment. When we go through, we'd always have some fees involved for offering those things. Those fees are usually two different fees. The manufacturer is going to have a little bit of money tied up there in order to offset some of the costs of offering those programs, but you and I are often paying a lion's share of the cost of offering those programs. In the years gone by, something like a promotional fee of say, $50 will be paid by you, and maybe 2% or 3% of the cost of that transaction might be borne by me, the dealer, and then you're going to come away with that credit card that's got that piece of equipment on it.
Now, as lending rates have gone up, the numbers here have changed quite a lot. The slice of the pie that the manufacturer is putting into buying down that rate has remained about the same, but because those bank lending fees have gone up so much, you and I are now bearing a much larger proportion of the cost of that financing. I'm holding in my hand here, one of our particular vendors that shall remain nameless, but these numbers are very typical in the industry right now, where we're seeing promotional fees, the fee that you're going to pay on your first bill now at $150, as much as two to three times as what we would have seen two years ago. While you're paying that $150, coming out of my pocket is now 7% more or less, to offer a 2.99% for 48 months, $150 out of your pocket, 7.3% out of mine, for something that's going to finance in the $5,000 to $6,000 range.
Between the two of us, almost $500, $600 in promotional fees, and dealer participation in order to offer a low rate for 48 months. Those terms can get worse. If you go out to longer rates, the fees are going to go up. Some of them approaching 8%. There is a lower rate down in here, at 0% out of my pocket, zero from yours, but you've only got six months to pay for it. It might give you an idea of exactly how much the manufacturer is putting in there. Only enough to cover that funds for about six months or so. You're going to want to keep an eye out for that. Between you and I, now, you're taking the purchase price of that machine and making it as much as 8% and 10% more expensive by going out and financing that piece.
This is a place where you hear people say cash is king. Cash can help you here.
Coming in with cash and not financing that machine is going to give you a lower purchase price, a lower cost of ownership. Like I said, this is very typical financing in the lawn and garden industry, think inexpensive zero-turn mowers, lawn tractors, lawn equipment, and sometimes, some of our attachment companies are going to use this type of financing. The next type of financing would be a secured financing. When you have secured financing, the lender is going to go to the state, they're going to file a UCC registration that gives them the right to come out and repossess that equipment if you happen to not pay your bills. As you can imagine, that right, that repossession makes this a less risky and less expensive type of financing.
Now, it's not usually used for that lawn and garden machinery, because you do have a lot more paperwork to do, so you're often going to have some documentation fees for your contract, and your state is going to levy some UCC charges. Those charges vary by state from anywhere from zero to the highest one in the country here in Pennsylvania, at $168. That's going to give them the right to repossess that machine. Now, this financing then, on the backside, the dealer numbers that you don't often see, more often than not, for us, is nothing. The manufacturer isn't taking money out of our pocket in order to pay for this financing package. More often than not, you're going to be offered two different deals to finance your machine or take a cash discount. One of those two things.
That's usually when you're going to know you're getting secured financing. It's the cash discount or the financing package. One of the two. Most of the machines that are sold out of here from Messick's are finance to machines. We're generally selling fairly expensive equipment. For that reason, a lot of that machinery is financed. Those costs are borne by the company whose name is on the side of the machine. I don't envy them right now at all. It's been a really rocky ride for all of these price increases and everything that's been happening out here. For the most part, we're seeing our vendors bear those costs still. Now, here's the got you. Here's the thing that you want to watch out for. Well, I would say, I haven't seen the lending costs on that side, and as far as the customer is concerned, increase a whole lot.
I don't believe in all cases the cash discount has kept up. When we were talking before with the unsecured financing where cash is king, when you're financing a secured piece of equipment, cash is not always king. There's machines out there right now, if we take a $30,000 piece of equipment, a middle-of-the-road number here, something easy to do the math on, you might see cash discounts offered to you in the $400 or $500, $600 range. If you put that same $30,000 into a 5% CD right now that's got a guaranteed return, it's going to return to you over $1,300 over the course of that five years. I always would go and do a quick amortization schedule. There are absolutely cases out there today that using somebody else's money and putting your funds over into a CD can put more money into your pocket than taking a cash discount.
You'll always want to be weighing those options. Unsecured financing, cash is king. It's dirty, you and I are paying the cost of those programs in a lot of cases, but if you have secured financing, take the minute, go through, run the amortization, and make sure the numbers are falling in your favor because sometimes financing can be cheaper in the long run. Shopping for a piece of equipment and we can help, you got parts or service needs for a machine you've already got, give us a call at Messick's. We're available at 800-222-3373 or online at messicks.com.