Over the past year, interest rates have been steadily ticking up to help alleviate nationwide inflation. Tick, tick, tick…when it happens, it feels like you can almost hear it, even if you’re not paying close attention to it.
Or you might be one of those construction contractors out there closely watching interest rates rise little by little and wondering how it’s going to impact a machine you’re ready to buy soon. Do I wait for interest rates to come back down? Will they even come back down? Do I make a move now or wait it out a bit more?
Interest rates are a key consideration for new construction equipment purchases, but there are ways to offset higher rates that you’d prefer were a bit lower. These four tips are great idea starters the next time you’re working with your financial provider — get the conversation started and see if you can sweeten your deal.
Bundle your financing with offers that give you more — or even pay you back. When you take advantage of a heavy equipment financing bundle, you get more than just a great rate. Our All-Inclusive Lease for Electric Heavy Equipment is a great example, giving customers extended coverage, physical damage insurance (currently U.S. only) and even special savings.
As another example, if you purchase and finance a qualifying Volvo machine with an extended warranty and Repair Maintenance Agreement through Volvo Financial Services (VFS), you can receive up to $4,500 in Smart Commercial Account credit. It doesn’t cost you anything to do it. That money can then be used down the road for maintenance, repairs or even a rental to supplement your fleet for a new job.
Bundled offers are generally available from captive finance companies like VFS that have a relationship with a manufacturer (in this case, Volvo CE). Many times, the bundled offers are put together by combining resources of the different business units to develop a customer-centric solution. Large banks generally don’t have these types of relationships with manufacturers and therefore have fewer options for structuring meaningful bundles built for specific types of equipment used on specific kinds of jobsites.
Look for special financing programs. Here’s an example of a bundle built specifically for a particular type of equipment — excavators. If you’ve never run a Volvo excavator before — or if it’s been three years since your last purchase of a Volvo excavator — VFS is offering its Excavator Homecoming program, where qualified customers can get 0% for 12 months on eligible new models with a warranty, plus $1,500 to $2,500 in Smart Commercial Account credit.
And even if you have purchased a Volvo excavator recently, the Excavator Pay Dirt program also offers low rates and Smart Commercial Account credit. Both programs are great ways to add a new Volvo excavator to your lineup.
Work with lenders that don’t charge prepayment premiums (PPPs).
A prepayment premium is a fee or charge imposed by a lender or financial institution when a borrower pays off a loan or debt before the agreed-upon maturity date.
If you secure a loan to finance a new piece of heavy equipment, the loan agreement may include a provision for a prepayment premium (typically in the neighborhood of 5%). This amount is designed to compensate the lender for any financial losses it may incur due to early loan repayment. By paying off the loan early, the borrower essentially deprives the lender of the interest income that would have been collected over the remaining term of the loan.
The good news with Volvo Financial Services is that we don’t charge PPPs on construction equipment financing — most banks, however, do. If you work with a captive financing partner like VFS, you could pay your loan off early without a penalty.
Or, of course, if interest rates do eventually go back down, you could also refinance at the lower rate.
Consider equipment leasing instead.
If interest rates are holding you back, a lease can give you more flexibility down the road.
When you lease heavy equipment, your monthly payments are typically fixed for the duration of the lease term (e.g., a 24-month fixed purchase option). Some loans include variable interest rates, which could affect your cash flow in a negative way. This stability in payments with a lease can help you budget more effectively and reduce the impact of rising interest rates.
Equipment leasing also often presents a lower upfront cost compared to purchasing. This can free up capital that can be used for other purposes or investments, reducing the potential exposure to rising interest rates.
A final benefit of leasing is flexibility at the end of the lease term. You can choose to return the equipment, renew the lease or upgrade to newer equipment. This flexibility allows you to adapt to changing business needs or to take advantage of machine advancements without being tied to outdated equipment. Also, you should consult your tax advisor/attorney, but certain lease structures may provide the flexibility for preserving your lines of credit, etc. with off-balance sheet tax treatment.
What about balloon payments for heavy equipment financing?
Balloons are probably not your best option to offset rising interest rates. A heavy equipment balloon payment is a lump sum payment that’s due at the end of the loan term. While it can lower your monthly payments during the loan term, it means you’ll have to make a substantial payment at the end. This final payment often represents a significant portion of the total loan amount. If interest rates rise during the loan term, it can become more challenging to find financing for the balloon payment, as the higher interest rates would compound the payment amount related to financing the balloon.
Purchase New Construction Equipment with Confidence
These four tips are just a few of the options to consider when budgeting for new heavy equipment purchases. If you’re in need of a new machine, be sure to check out our handy online Financial Calculator to understand what you can afford and what your payments will be. Then, if rising interest rates are holding you back, talk to your financial provider or give us a call at Volvo Financial Services — our specialists are also experts in the construction industry, so we can help ensure you’re getting the financing options that make the most sense for your business.
By Kenneth Borgeson, Volvo Financial Services
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