Business and Finance

How interest rate increases impact equipment finance

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With so much press focusing on the significant increases in home loan rates and interest rates in general, it is timely to have a look at what this means for businesses, Finlease reports.

Where the five-year fixed home loan rates increased to around 6.5 per cent, it won’t be surprising that motor vehicle and equipment finance interest rates have also moved into the 7 per cent plus range.

As recently as one year ago, home loan rates, and equipment and motor vehicle finance rates were around 3 per cent or lower. So, what is the effect of these interest rate increases in real terms and how may this affect your business moving forward?

Unlike home loans where a doubling of the interest rate resulted in an increase of 45 per cent or 100 per cent in the monthly payment, the monthly payment effect on the equipment finance loan was much lower at around 8 per cent. This is simply due to the shorter term where the entire debt is fully paid off over five years.

In a world where businesses are seeing increased costs across the board in such areas as labour, materials, as well as the actual purchase cost of vehicles and machinery, debt (interest rates) is also one of these increasing costs.

To prepare, businesses today can:

  • Access the Finlease calculator at finlease.com.au/equipment-finance-calculator to test payments on a range of interest rates
  • Review your costs of doing business and adjust pricing accordingly
  • Utilise the expertise of a finance broker to seek out the most favourable equipment finance solutions
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How home loan rates compare to equipment finance loans.

How long can we expect these increases before we reach the peak?

The reality is that the harder you hit the brakes, the sooner you slow down the inflation, however if you hit the brakes too hard, you risk stalling the economy, which can lead to a recession.

The RBA will need to closely monitor this to get the balance right.

The best intel we can see at this stage, is around 12-18 months, or when inflation returns to the 2 to 3 per cent band required by the RBA to stabilise inflation to an acceptable level. Once this band is achieved, we can expect interest rates to remain at the level required.

However, if inflation drops below this desired band, we can reasonably expect to see some reduction in those interest rates to ensure Australia has a soft landing and avoids a recession.

Our advice is to also utilise the expertise of your finance partner or accountant. Businesses should also be planning their truck or vehicle purchases to take advantage of the government tax incentives that are ending June 30, 2023. This incentive is available for new and used (including private sales) for any company with a turnover of less than $50 million.

To find out more, please visit finlease.com.au

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