Will borrowing costs come down? Not as fast as everyone would like. While lenders’ rates typically follow the Federal Funds Rate directionally, the relationship isn’t as straightforward as many might expect. Lenders adjust more slowly, cautiously, and incrementally than the Fed. A 50 basis point Fed rate cut doesn’t mean an immediate equal reduction in lending rates. With the higher default rates across lending sectors in 2024, lenders will likely reduce rates more slowly than Fed cuts as they weigh multiple factors beyond the Fed’s actions. Borrowers shouldn’t expect quick or one-to-one reductions in lending rates following Fed cuts.

I wrote it because there was a misconception that once the Federal Funds rate was lowered that all lending rates would follow on day one. And, as my passage above indicate, they don’t.

But it occurred to me that most people simply take rates on a surface level. That they really don’t know what goes into a lender’s interest rate on any particular loan or lease. So I thought it might be fun to do a little series on interest rates, so you can get a really good idea of how a lender arrives at the rate borrowers pay.

Here are a few sneak peeks of future topics and posts:

• The relationship between risk and the rate
• How loan type and intended use affects rates
• Collateral and rates
• Internal cost of funds and rates (aka, “how much does money cost?”)
• Defaults and rates
• Credit scores and other risk profiles affecting rates
• Benchmark rates and market conditions
• And more!

My goal is to give you a look under the hood at how lenders generally arrive at the rates borrowers pay. There is definitely more to it than meets the eye. I personally find this topic fascinating, and I hope over the posts to come, you will too. 

Hey Fletch, I know you always tout getting equipment when you need it but aren’t rates coming down soon? Wouldn’t it be better to wait? Dave P.

Hi Dave,

Honestly, assuming the equipment will earn you revenue, no, it is not better to wait. There are three reasons for this. The first is, as I recently posted, Lending rates are not a one-to-one correlation with Federal Funds Rate movement. Lending rates will stay steady for some time before they follow suit and slowly lower. You may be waiting for quite some time.

The second reason is inflation is still here. Annual price hikes are common in many industries. Waiting, especially at this time of year, almost always ensures you will pay more. 

Lastly, it’s like I mentioned earlier – getting equipment when you need it earns revenue. Don’t miss out on that. 

I hope this helps.

Fletch

Hi Fletch, I am selling a dump truck and the second I sell it I want to buy a larger one. I have it all picked out and am ready. What are the chances you can handle the financing for the sale and the financing for my new dump truck at the same time? Mark

Hi Mark,

That’s a great question. Of course, it would depend on your buyer’s details. But assuming they qualify for financing and everything checks out across both deals, we can work with everyone so there’s little to no gap between the transactions. Let us know and we’ll get to work.

Fletch

Hey Fletch, You picked the Braves to win the world series but they got bounced in the first round. What’s up with that? Pete M.

Pete,

There’s a reason I don’t make my living as a gambler! But I did hit with the Celtics, right? I usually hit at least one a year, so there’s that.

I did want Atlanta to win. But they didn’t. And of course, there’s no crying in Baseball…

Fletch

Something really big happened at the last Federal Reserve meeting on June 14th – rates did not go up for the first time since January 2022. They didn’t go down either – they just held fast. 

However, let’s not break out the party hats yet – in reading the tea leaves from statements made, it seems more hikes will be coming. However, it also seems the shock and awe type increases of 75 basis points and such are over for the time being. That’s good news. We can deal with smaller hikes, but those big ones are tough for everyone.

This tells me that rates may not return to the lows we experienced through most of the 2010’s for a very long time, if ever. During those years, it was incredibly inexpensive to borrow money. However, simple logic tells us that the cheaper something is, the less value it has. In this case, we’re talking money, so if you make money cheap, that can technically be a precursor for inflation. As a result, we’re going to be living with rates higher than recent times, but definitely not out of line historically either. 

This also tells me something else: you can borrow with confidence that you won’t be left out in the cold. Even if you borrow and lock into a rate, and sometime late next year rates begin to fall, they aren’t going to fall by an amount that’s going to make a huge difference to most readers here – 25 basis points at a time (which will likely be the amount of any 2024 decreases) is not going to make much of a difference unless you are borrowing in the millions/tens of millions.  

I’ve been saying this for a year-plus now – if you need it, go buy it. That’s good business. 

Ok, onto other news: I said this in my prediction post: “If they don’t implode, I like the Brooklyn Nets to win it. It’s not fair to pick a second team and have it count, but if it did the Denver Nuggets are a dark horse.”

Well, I’m now counting it. Because the double dip happened: if you follow basketball at all, you know the Nets DID implode, and the Nuggets won it all. So that was a pretty good prediction. 

And let me sign off with this: my Braves prediction is looking strong so far.  

Usually I do a “hot and not” post every year, and this year, I reported that just about everything was hot. But as I looked at some reports the other day, two things jumped out at me. The first is that construction equipment financing was robust. This usually happens in a good economy, as that’s when things get built.

But what really caught my eye was the fact that pre-owned construction equipment took a solid jump in 2018. It seems that there are plenty of construction firms leasing used construction equipment like backhoes, dump trucks, bulldozers, and other heavy equipment. Financing used construction machinery was always something firms did to save money, but it took such a jump recently that I asked myself “why?” I can guess at a few reasons:

There are Plenty of Good Pieces Out There. In “good times”, companies are quicker to replace machinery with newer, better models. This leaves a larger than usual inventory of gently used construction equipment.

Leasing / Financing Rates are Low. Rates are still low, despite a few small increases. Most experts feel more increases are imminent, so jump on this.

Machines Last Longer Today. There was a time when companies would shy away from taking out monthly payments on a used backhoe (for example), but today, they are built so well that even a used machine will outlive the payment term.

Financing used construction equipment makes sense for many construction firms. The numbers bear this out, and it looks to continue well into 2019.