Comprehensive Tractor Financing Guide

Paying for equipment is one of the largest expenditures a farmer will face after land purchases. According to Farm Progress, “Over the past 45 years, on average, about 16% of crop value ends up as equipment investment.” However, as farm revenues decline, farmers must take care to make smart financial choices when it comes to purchasing equipment. You need to make sure that your selections will fit your current budget, while also having the capacity to meet the growing needs of your farm. While farm equipment can include everything from combines to irrigation systems, in this guide we’ll focus on how to purchase the quintessential piece of farm machinery: the tractor.

Choosing the Right Tractor for Your Needs and Budget

On the other hand, if you purchase a tractor that’s much too powerful for the job at hand, it could be detrimental to the engine, not allowing it to reach the proper temperatures to run efficiently. Josh at the Stony Ridge Farmer Vlog offers this simple advice for farmers setting out to purchase a new tractor: “No matter what size piece of land, get a tractor that’s a little bit bigger than you need.”

While it’s possible to find a used low-horsepower or high-hour tractor for less than $10,000, expect to spend more, at least $12,000, on a quality, used, low-horsepower tractor. Costs only go up from there, with new tractors with horsepower (hp) over 400 easily fetching $300,000 or more. Once you have an idea of what size of tractor you’ll need, you can start considering your budget, whether to buy new or find a quality used tractor, and how you will pay for it. 

Buying New vs. Buying Used

While used tractors will be less expensive than their newer counterparts, price is only one of the factors that a farmer should consider. Because a tractor is a major investment, having a quality, reliable piece of equipment should be a top priority. However, this doesn’t necessarily mean that only new tractors should be purchased, as good tractors are built to last and hold their value. 

So, let’s say you are leaning toward a quality used tractor to save on costs. How do you know if the tractor you’re considering is priced well? As William Edwards, a retired economist at Iowa State University’s Extension and Outreach, writes, “age and accumulated hours of use are usually the most important factors in determining the remaining value of a machine,” after you consider its original retail price, with the average lifespan of a tractor being about 15 years. A high-hour or older tractor’s lifespan can be stretched if it was well-maintained, but be aware that many will require an overhaul and possible engine rebuild by 5,000 to 10,000 hours, even with regular maintenance.

It’s also often impossible to tell the true condition of a tractor without a thorough professional inspection that includes access to the tractor’s maintenance logs. Buyers should inspect six main areas including overall tractor appearance, articulation point, engine compartment, cab, PTO shaft, and hydraulic power. Only when you are certain you are getting a good price for the condition should you take the plunge into purchasing a used tractor.

Unfortunately, advances in technology can render some older tractors obsolete, no matter how long they were designed to last. As Josh at Stony Ridge Farmer Vlog points out, older tractors from the 1970's and 1980's don’t have the hydraulics to support a front-loader, which is often considered an essential piece of farm equipment. There have been many additional technological advances in the past few decades, from shiftless transmissions to precision planting with GPS. However, Farm and Dairy Newspaper notes that the simplicity of electronic components in older tractors can also be tempting, as farmers can avoid the repair costs when something goes wrong with all those high-tech upgrades.

Ultimately, because of the sticker price of most tractors regardless of age, it’s not surprising that many farmers prefer to buy new. Buying a new tractor will allow you to know exactly how your machine was cared for, give you greater access to a range of modern implements and technologies, and also give you the benefit of better warranties and protection plans, as well as more financing options. What makes this option even more enticing to many farmers is the fact that tractors don’t lose their value as quickly as personal vehicles do. After the first year or so, value on tractors tends to stabilize, depreciating at predictable, low rates, based largely on usage.

Financing your Purchase

Once you’ve found the right tractor for your needs, as well as your budget, you may find that you will have to explore financing options in order to complete your purchase. While smaller equipment purchases can often be paid for upfront, even on a tight budget, it might make more sense to finance the right equipment needed for your farm. Here are just a few of the benefits of financing your tractor purchase:

1. You can expand your farm quicker by purchasing equipment for you to grow into, rather than grow out of
2. Equipment financing charges and some initial purchase costs can be tax deductible as a business expense
3. You can save time and labor costs by purchasing larger equipment that gets the job done faster
4. You may be able to avoid the pitfalls of buying questionable used equipment or overworking equipment that is too small for the job
5. You can establish credit for your business for future purchases

Types of Financing

There are numerous avenues for financing your agricultural equipment purchases, both locally and nationally. Which financing method you choose will depend on many factors, including your credit, where you live, the size of your farm, the size of the loan you need, and which special programs you may qualify for. Many of these special programs and loan options are available through your local lender, in addition to conventional loans, so it’s often advisable to visit your bank branch and talk to your loan specialist as you begin exploring your options.

Conventional Loans through a Lender

Established farmers with some credit may qualify for conventional agricultural loans, which generally have simpler applications, fewer restrictions, and competitive rates. These loans can often be used to purchase either new or used equipment, and generally have terms in the range of one to five years. Farmers can work with their local lender, or find competitive national rates online. Also consider that working directly with your own bank can also provide greater flexibility. Since community lenders are well versed in a variety of local and national products, they may be able to find something that works for you, even when other options might not be panning out.

Financing or Leasing through a Dealer

Sometimes dealerships are able to offer financing with very low interest rates, and it’s a good idea to investigate what deals are available as you explore your options. However, in order to qualify for the best terms that dealers offer, borrowers will need to have an established financial record as well as cash for a down payment (usually 20%). Otherwise interest rates may be significantly higher. Borrowers are often expected to have good credit scores and to have been in business for at least two years. Most of the time, used equipment will not be considered for these deals. Additionally, sometimes the low interest rate is introductory, only applying to an initial portion of the loan. Be sure to research advertised loan terms before setting foot in a dealership to avoid high-pressure situations that result in less-than-desirable terms.

Leasing equipment is another option available through dealers, and has become increasingly popular in recent years. Sometimes out-of-pocket costs of leasing are comparable or even better than purchasing a new tractor outright—but borrowers have to be financially savvy to determine if that will be the case for them. Here’s an example provided by Jesse Newman and Bob Tita of the Wall Street Journal in a recent article titled, "America's Farmers Turn to Bank of John Deere": 

A new tractor costing $250,000 can be leased for about $30,000 a year. That compares with the cost to buy with a loan, which would require a 20% down payment of $50,000 and more than $40,000 a year in payments for five years for the remaining $200,000 with 5% interest.

Keep in mind that when you are done paying off a loan on a tractor purchase, that tractor, and all the value it retained after depreciation, belongs to you. While lease payments may be similar to loan payments, with a lease the tractor ultimately goes back to the dealer. If you are looking to keep a piece of equipment for the long term, and can handle a slightly higher monthly payment, it is advisable to get a loan rather than lease. In their article, Pros and Cons of Far Equipment Leasing, Successful Farming provides great insight into this complicated debate.

USDA-Backed Loans

The USDA Farm Service Agency (FSA) offers guaranteed loans for farmers available through local lenders. These loans are backed up by the USDA against losses up to 95 percent, which limits the risk lenders take on when lending money to farmers who may not qualify for traditional loans, putting credit within reach of many. Additionally, these loans are not limited to only purchasing new equipment through dealers. The USDA guarantees loans of up to $1,750,000 (2019 rate, based on qualifications of borrower) with terms between one and seven years, and interest rates are negotiated with the local lender who services the loan. In order to apply for these loans, you should visit your local lender, who will provide the appropriate forms and help you submit them. The USDA also offers direct loans of up to $400,000, also with terms of one to seven years and fixed interest rates. For more information, visit the USDA’s Guide to FSA Farm Loans or contact your local lender.

Missouri First

Missouri First is a program by the state of Missouri designed to create economic opportunities within local communities by providing low-interest loans to businesses through partnerships with local lenders. Missouri First has a special division for agricultural loans, which can provide for everything from land purchases to renewable energy production. Their Farming Operation Loan supplies funding specific to farming operations, including equipment purchase. Applications are available on their website, and should be completed with the help of your Missouri-based bank.

Beginning and Socially-Disadvantaged Farmers

Lastly, there are many opportunities for farmers who are starting out or who have historically faced hurdles that have prevented them from succeeding in the world of agriculture. The USDA FSA program is sometimes known as the “Lender of First Opportunity,” as over the years it has provided loans to countless beginning and socially-disadvantaged farmers who have been “subjected to racial, ethnic, or gender prejudice because of their identity.” Special funds are set aside to serve both new and underrepresented farmers who may have difficulty qualifying for other loans, through both their Direct Loan Program, as well as Guaranteed Loans available through your local lender.

Farmers in Missouri and Iowa also qualify for multiple statewide loan programs designed to help beginning farmers establish their businesses, and can be used for things such as land and equipment purchases. Missouri’s Beginning Farmer Loan Program works with banks to provide loans specifically to new farmers. Interest rates are exempt from federal taxes, so banks are able to pass on their savings to borrowers in the form of lower interest rates. For residents of Iowa, the Iowa Finance Authority has a similar offering: Iowa Beginning Farmer Loan Program.

In addition to the Beginning Farmer Loan Program available for Missouri farmers, Missouri First also has a special loan program for beginning farmers. For more information on opportunities for beginning farmers, visit our Financing Options for Beginning Farmers in Missouri page.

Next Steps

There are a lot of options out there for farmers looking to purchase equipment and a good first step when considering financing is to visit a local lender, who will have the expertise and experience to guide you in the right direction and find a loan product that will work for you.

BTC Bank has been a member of this farming community since 1919, the same year that John Deere first began manufacturing tractors, and we understand the needs of our local farmers. We offer a variety of tractor loans and farm equipment financing options suitable for every agricultural need. With local branch offices in Albany, Beaman, Bethany, Boonville, Carrollton, Chillicothe, Gallatin, Lamoni, Maysville, Osborn, Pattonsburg, and Trenton, you’re sure to find a location convenient for you. Contact us, visit a local branch, or call 1-877-BTC-BANK for interest rates and details about how we can help you meet your farming goals.