Managing Volatile Times: Rate Locks for Farm Machinery Purchases
Uncertain, volatile financial times in the farm sector are changing how many producers manage their machinery as they look to cut cost and maximize return on investment (ROI) of every tractor, combine and implement they operate.
Financing machinery has a role in producers' ability to weather turbulent economic times. While interest rates have spent years at relatively low levels, they're on the rise and creating another potential source of monetary pressure for those financing machinery. Preventing those rising rates from eroding revenue potential is possible through interest rate locks.
Interest rate locks can help alleviate that pressure by ensuring buyers can lock in a rate for a specified period of time. For machinery purchases, a potential buyer can apply for a rate lock that will keep the rate from increasing for up to 45 days. At the end of that period, he or she has the option to renew the lock and retain the rate.
When rate locks work
Rate locks are seeing increased demand today as the U.S. Federal Reserve considers more interest rate increases through the end of 2017 and beyond, says AgDirect Territory Manager Jill Beck.
That demand is especially strong for big-ticket purchases because of the difference a lower rate can make in overall cost compared to the cost of the rate lock itself. Generally, there is a small fee for a rate lock, typically 0.01% of the total purchase price of financed machinery per day.
"When we go eight to 10 years without a rate increase from the Fed, we don't worry about this as much. But, now we've had three, with the possibility of more, as the markets remain uncertain," she says. "Rate locks make the most sense when purchasing something larger, like a cotton harvester or combine."
Other financing options
On the right purchases, a rate lock can help offset any potential increases, while in some cases, a lower rate may not necessarily mean the lowest purchase price. That makes it important for the buyer to do his or her homework before paying for a rate lock.
"If a producer commits to purchasing a combine, sprayer or tractor through an early-order program but won't take delivery until March or April, you might get a rate lock. But, if rates go up a quarter of a percentage point, there may not be the concern to justify a rate lock," Beck says. "Sometimes, you have to determine which is more cost-effective: Paying the fees for a rate lock or paying higher interest rates. Just because a manufacturer is offering zero percent financing, it may not be the best deal. Oftentimes, there is a cash incentive that is more cost-effective than the zero-percent financing offer.
"Taking the cash incentive and using outside financing frequently produces the lowest total cost to purchase," she adds.
Relationships are key
With comparisons between the state of today's farm economy compared to that during the farm crisis, Beck says the efficacy of rate locks is a clear indicator of today's stability relative to the 1980s. They are financing tools available to buyers, but they may not fit in every purchase scenario. It's important for buyers to work with sellers and leverage relationships with dealers and financing professionals to find what's best for their operations.
"If we were in the '80s, I would say we can absolutely save money using rate locks. But, in today's market, they are sometimes marginal," she says. "It's important to work with a financing specialist to do all the right calculations before making a decision.
"This is a time when it's important to know all the numbers and have a good relationship with your financial partners as well as your dealer," Beck adds. "They can really help guide you toward the best decision."
Your machinery financing partner
At AgDirect, we have financing options for purchases at the dealership, whether lease or outright sale. We’re dedicated to agriculture and offer many financing options to fit any operation, whether buying used or new machinery. We offer financing for buying, leasing or refinancing, with fixed- and variable-rate terms from two to seven years. We also offer delayed payment plans with no prepayment penalties.
Want to learn more? Contact your nearest AgDirect representative!