A working farm is all about the equipment and machinery you invest in it, from vehicles to irrigation pumps, e.t.c. It is little wonder then that farm equipment has been accounting for up to 16 percent of all crop revenue, in the US, at least in the last four and a half decades.
Unfortunately, most farm machinery is expensive. Given the all-terrain capabilities of tractors which increases their dollar values and coupled to the declining values of modern farms due to shrinking space, it can be a herculean task landing a new tractor on a cash basis.
Most farmers do not have ready cash to pay upfront. Fortunately, there are ways for financing your tractor. Let’s find out.
How tractor financing works in the US
Tractor financing basically works in the United States like any other typical loan, only that it has a different variable rate (APR) than typical financing.
Basically, you need to have a credit score of 680 to qualify for immediate tractor financing, though this is not a mandatory criteria. If your credit score is low, you can still access funding if you offer collateral, which could include other old equipment on the farm. For instance, the lender might be willing to give you a quarter of the loan but if you are willing to provide other tractors you might already have as collateral, they might extend the rest of the money minus down payment. To secure100 percent financing, however, it is essential that you have a good credit score.
A tractor loan has a maturity period of between 2 and 7 years.The upper limit (7 years) mostly applies to the United States Department of Agriculture (USDA) loans. Banks and other lending agencies typically offer a maximum of 5 years.
To apply for tractor financing in the US, you need to pass the following eligibility stipulations:
- You ought to be a United States citizen with proven ability to repay the loan. This proof may include ID documents, the farm’s annual revenue balance sheets and credit information.
- Because USDA is favored by most, it has the longest qualification period – typically a month. If you need the loan faster, you can try to get financing from equipment dealers like John Deere or conventional lenders like banks, credit unions and even web-based lenders.
In case you do not want a loan but rather want to use the tractor on your farm and then return it to the lender, you may qualify for a lease. For this as well, you need to be an American citizen with proof of the ability to settle monthly payments.
Closely related to tacor financing is tractor insurance. We have a quick guide on this. Please check it out. It’s important that you insure the tractor even as you work hard to finance it.
The major types of tractor financing in the US
The main types of tractor financing methods that you can find in the US include:
Equipment loans or direct financing
This is where you pay for a new tractor with a down payment. You then settle the rest on a monthly basis through installments. The tractor becomes yours at the end of the repayment period.
Local lenders such as banks, work quite closely with their clients and tailor special rates for them that might be slightly higher than the USDA rate. However, you can consult with credit unions, if you are a member, for a better rate than that being offered by banks.
Loan repayment periods typically last between 2 and 7 years.
Leasing
In this approach, you use a tractor for an agreed period of time at a monthly fee. The fees are usually lower than a typical loan. At the term’s end, you have to return the equipment to the lender.
The big advantage of leasing over financing is that you have deductible tax because you are not committing to buying the tractor. However, this tax advantage can change if you decide to purchase the equipment.
Leasing lasts between 12 months ( or less) and 72 months.
Refinancing
This involves switching an existing loan from a lender to another who is offering a lower interest rate than the current one.
This is best handled by credit unions, which unlike banks, offer very competitive rates.
USDA backed tractor financing loans
The USDA offers comprehensive farm loans that borrowers can access to purchase equipment at a competitive national rate for a period of between 2 and 7 years.
It offers these loans under the Farm Service Agency (FSA), on the premise that the farmer needs cash help to initiate, extend or keep a farm productive.
The rate is currently capped at less than 4.75%. Operating loans from USDA can help you do more than purchase equipment: you can also use them for seed procurement and farm maintenance.
How used tractor financing works
Used tractor financing is a way out for most farmers who do not have enough to settle for new equipment on loan.
You can opt for a used tractor in a good working condition and get it through a lender. The first step is to scour for the best second hand equipment, preferably one with low mileage and have it tested so as to determine if it meets mechanical inspection standards.
A lender will enter the invoice from the dealer into the loan records,settle the amount with the dealer and enter their name in the ownership deed alongside you (the buyer).
Once you finish paying the installments, the dealer forfeits their name from the ownership deed. This means that you become the sole owner of the used tractor.
Some of the key lenders that extend used tractor financing include: credit unions, banks and online outlets.
Tractor financing for bad credit: how it works
A credit score of 300 to 579 is regarded by banks and other lenders as poor. This, therefore, can lead to difficulty in securing loans because lenders distrust your ability to maintain steady repayment.
Good news is that all is not lost. Tractor financing for bad credit is available even in USDA and here is how it works:
- If you have scoured banks with no success, you can settle for a microloan from USDA, whose maturity period is 12 months at a cap of $50,000 and works no matter the credit score. It can cover tractor parts such as plows.
- You can consult dealers of equipment who also offer ‘captive lending,’ a type of arrangement between manufacturers and lenders to help customers with low credit ratings secure equipment. Though the down payment in this case may be rather high, it is worth the price for bad credit buyers who cannot secure financing anywhere else.
FAQs
What is the longest you can finance a tractor in the United States?
7 years is the maximum tractor loan duration. Typically, tractor financing has a maturity period of between 2 and 5 years in traditional lending agencies such as banks. However, rural and national federal agencies including FSA and credit unions can offer a maximum financing period of 7 years at a flexible rate.
What is the interest rate of tractor loan in the United States?
The USDA rate is currently capped at less than 4.75%. However, using business day SOFR rates, it can go up to 6.75% for the Farm Operating direct loan, as of April, 2023.
What is tractor mortgage?
Tractor mortgage is similar to refinancing only that here you are taking a loan against a tractor you already own. In this case the tractor you own becomes your security. This allows you to secure a new tractor. In the case of tractor refinancing mortgage, it typically means taking a new loan on a tractor you are still paying for (basically up to 90 percent of its value, with most lenders) and maintaining the old installment duration and similar interest rates.
How hard is it to get tractor financing in the United States?
Getting tractor financing is quite easy for those with credit scores of above 680, which puts them on the ‘good’ rating index. With other documentation like annual business returns of your farm and tax information, you can secure such a loan within the same day from a bank. However, if you have a poor credit score, the period may drag because of the time wasted moving from lender to lender.