Anyone who has applied for a car or equipment loan in the last few weeks may have been a little taken back and thought the rate offered by brokers, dealers and the banks seemed high.
The rates are higher, but this is not because the banks want to charge more. It is simply the cost of funds is on the rise.
For those who want to know why, please read on. For those who don’t, please accept the honeymoon period of extremely low rates is over, and that rates have gone up, and there is nothing we can do about it.
So, we have enjoyed the downward trend in interest rates for a seemingly long time, so when rates move up, it’s a bitter pill to swallow. However, this is the reality we now face.
But what many people don’t understand is “why” have rates suddenly gone up. When many people think about interest rates, they don’t realise the interest rates for houses and cars are different. Firstly, cars & equipment represent higher risk, therefore attract higher rates. The other significant difference is that cars & equipment rates are all based on “fixed” interest rates. Variable home loan rates are still relatively low. However, because it is anticipated that rates will rise in future years, the future fixed rates need to be increased to allow for this predicted interest rate to rise
For some time, strong businesses buying new assets have had access to very competitive rates ranging from 3% to 5%. But with recent rises, a rate between 4%-6% would be considered a competitive solution.
Some scenarios that present higher risk will mean clients pay higher rates than the above mentioned. However, the primary purpose of this blog is to educate customers to psychologically prepare for higher rates when applying for car and equipment finance.