On Sunday (March 15), the U.S. government pulled one of its biggest economic levers. The Federal Reserve announced it will cut its target interest rate to a range of 0% to 0.25 percent. We haven’t seen rates this low since the depths of the 2008-09 recession. The hope, of course, is to stimulate economic activity by making it cheaper for organizations to borrow money and acquire assets. From a consumer perspective, there’s also the hope that lower interest rates will mean lower mortgage rates, lower credit card APRs, more affordable auto loans — and new spending.
While it’s good to see the government taking steps to mitigate what appears to be an almost certain recession, it’s somewhat of a longshot to expect an immediate economic uptick. Even with cheap money available, the paralyzing effects of the coronavirus and the potential for tighter social lockdowns across the U.S. will be difficult to overcome. If the rates stay in place, however, it’s safe to assume they will lead to an increase in economic activity when things begin to return to normal. After all, it’s difficult to spend money if dealerships are shut down and salespeople are stuck in their homes.
For all lessors — including banks, independents and captives — the Fed’s announcement of 0%-0.25% rates and the potential for negative rates creates both challenges and opportunities. A clear challenge is the possibility that rates on existing deals could fall below the lessor’s spread. Or in the case of negative interest rates, the language for some deals could result in no margin at all. Or even a loss.
For new deals, new calculations will have to be done to establish a floor that guards against these no-margin or negative-margin scenarios. The U.S. has rarely seen 0% rates and we’ve never seen negative rates in the history of the Fed. So, it’s safe to assume most lessors don’t have processes in place to accommodate this unprecedented state. Executing the complex calculations required to ensure the profitability of deals and safeguarding against for costly human errors in those calculations will be difficult if lessors are using spread sheets.
From a business development perspective, lessors should be able to capitalize on the new rates and offer extremely attractive terms for lessees of all sizes and across all asset classes. The key will be preparation. Lessors will need to have systems in calculations and terms in place that lead to sound, profitable deals.
This situation — both in the near-term and in the months ahead when we emerge from the current coronavirus chaos — present different challenges for lessors. IDS understands this and we’ve been working hard on new IDScloud capabilities to meet those challenges.
So, if you’re currently on IDScloud and you want to know how to add capabilities to your existing platform, contact us. If you’re using our on-premises software and want to know how to make the move to cloud, contact us. Or if you’re currently on spreadsheets and you want to move away from them now, contact us.
We’re digging into news from the Fed and we’re working hard to make sure our customers are ready for any outcome.
Kristie Kosobuski, CLFP Sr. Director Product Management and Product Marketing