Fed Funds Rate Rising, Still Low Historically. Source: Federal Reserve

Fed Funds Rate Rising, Still Low Historically. Source: Federal Reserve

Barring the U.S economy suddenly slamming on the brakes — and you would be hard-pressed to find any economist or analyst worth their salt who would make such a prediction — interest rates are going to continue to move higher.

The Federal Reserve in March lifted a key interest rate to its highest level since 2008. While it remained to be seen at press time if the Federal Open Market Committee would raise the Federal Funds Rate again when it met in early May, the central bank has forecast a total of two more increases this year and three more in 2019.

The good news is, this means Fed officials believe the economy is in pretty good shape — and rates will still be relatively low by historical standards. The bad news is, it’s going to cost you more if you’re financing new equipment for your fleet.

Some trucking companies over the past decade have used a variable interest rate financing program to pay for large purchases. This made sense: Rather than being locked into a fixed-rate program, they were able to take advantage of then-falling interest rates and less expensive financing. But with rates already heading back up and expected to go even higher, it may be time for a new strategy, according to Anthony Sasso, head of TD Equipment Finance at TD Bank.

Sasso told HDT that in this atmosphere of rising interest rates, having a “predictable cost going forward can benefit a lot of clients.” In other words, while fixed-rate financing, say for over a 60-month period, can and usually does have a higher interest rate than a variable-rate program, you get with it one thing that variable rate financing doesn’t have: predictability.

Even if your fleet already has a variable interest rate on equipment it already financed, you might want to think about switching to a fixed-rate loan.

“A fixed-rate loan gives the borrower more certainty in a rising rate environment,” Sasso said. “For example, if and when rate increases occur, a borrower’s monthly payment will not be impacted, because they are locked in to a specific amount each month. This also has a positive impact on the company’s cash flow.”

There are many different types of fixed-rate loans to choose from, he said, including tax-oriented leases. These are loans done in the form of a lease, with three- to five-year terms for tractors and seven-plus years for trailers, allow companies to bring down the monthly equipment finance cost.

“Tax-oriented leases enable companies to take advantage of reduced rates that are passed through by the lessor, and in some instances, afford the opportunity to purchase the equipment at the conclusion of the lease at an agreed-upon value at the time of lease origination,” Sasso said.

But just because interest rates are rising doesn’t automatically mean you need to refinance, Sasso added. The reason? That big corporate tax cut passed by Congress late last year.

“If we look at the effect of tax reform that occurred at the end of last year, what you see is a lowering of the overall federal tax rate,” he said. “That provides cash flow saving that could potentially offset or mitigate any of the interest rate hikes.”

Related: Raising Federal Fuel Tax Makes Economic Sense

About the author
Evan Lockridge

Evan Lockridge

Former Business Contributing Editor

Trucking journalist since 1990, in the news business since early ‘80s.

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