Frequently Asked Questions
Interest Rates
How do interest rates affect leases?
Leasing is a very attractive financing alternative when making a new equipment acquisition. Currently, there is a lot of uncertainty with respect to economic conditions. Using a lease as an alternative to a cash purchase or bank financing can have a tremendous positive impact on present and future cash flows and tax liabilities. Lease rates are still very low compared to historical rates. Low rates, economic conditions, and lease benefits are all great reasons to consider leasing as a finance alternative.
The Economy
There has been a lot of news about the economy lately. Are we on the verge of a recession? Is the economy slowing down, or not?
In the current administration, the economy continues to grow. Reduced regulation and tax rate law changes have helped the economy grow and low unemployment has encouraged capital equipment acquisition. Some are predicting recession in 2020, but current political climate and resulting economy is tough to predict.
Interest Rate Fluctuations
When the Federal Reserve raises “interest rates” are all rates affected?
One of the first leasing advantages is that payments are fixed for the term of the lease when funded, so even in a rising interest rate environment, you can lock in your rate when leasing.
When the Federal Reserve raises or lowers “rates,” it is acting on one interest rate – the Federal Funds Rate. This is the rate that banks charge each other for overnight, or short-term, loans. Banks use these loans to meet federal obligations to maintain certain levels of reserves.
Lease Rates
Are lease interest rates determined by a controlling central entity or bank?
Most lease rates are determined by the yield from Treasury bills. Treasury bills are short-term debt securities issued and backed by the U.S. Treasury. Treasury bills do not pay explicit interest; rather they are initially sold at a discount from their maturity value.
Summary
Where is this all leading?
The US economy continues to grow, the Fed has raised rates multiple times, and although they have indicated no more increases in the near future, we are still in a rising rate environment. Most likely, all rates including cost of lease financing will increase in the future. However, when a lease is funded with DFI the monthly payment is fixed for term of the lease and not affected by future interest rate increases.
If a business is considering making an equipment acquisition, then leasing is a very attractive option. Lease rates are at historic lows. Leasing can help an organization better manage its cash flow situation, matching the lease term and cashflow to the asset useful life and depending on the type of lease, expense the lease payment or take advantage of accelerated depreciation.