Have you noticed how Wall Street overreacts when somebody whispers about rising interest rates? Since 2015 we’ve heard interest rates would be going up after years of ultra-low rates. Yet, earlier this month the fear of rising rates still caused traders to panic, resulting in a record one-day point fall for the Dow Jones.
The economy has made a strong recovery since the Financial Crisis of 2008, and as a result, the Fed has slowly started to increase rates.
While Wall Street may be in an all-out panic about interest rates rising, looking at this in context I can confidently say that when interest rates go up…we won’t see record highs like we did in the 70s when the fed was waging war with inflation.
I find myself in this same trap when making purchases, like the car I recently bought. I heard my grandfather in my voice when I said, “I’m not paying that much! A car used to cost a lot less!” The fact is, if something is constant long enough, people develop expectations – it’s human nature.
I thought we could take a stroll down memory lane (or history lane if, like me, you weren’t around in the early 80s.) Interest rates have been NEAR zero for a LONG time. Like HISTORICALLY LOW. So do you often hear, “the rate is too high”? Often, that’s because people have been conditioned to think that way by 7+ years of declining fed rates.
Below is a historical depiction of fed rates since 1950, rates have been near 0 since the financial crisis of 2008.
In December 2017, the Federal Reserve executed their third rate increase of 2017, their fifth since the financial crisis in 2008. We are finally entering that period where consistently low interest rates have consumers lulled into a sense of security that rates will stay near zero… but rates are now on the rise. The Fed has also stated they plan to raise rates at least 3 times in 2018.
Sometimes expectations are a good thing. Imagine it is 1983, and someone just offered you a rate that is 6% lower than it was just 2 years earlier. You’d feel great about this as you likely expected a higher interest rate. Your lender would also feel great about offering you a rate that exceeded your expectations. The situation today is tougher. We are at the tail end of 7 years of UNPRECEDENTED low rates. Rest assured this trend will dissipate just as quickly as the plaid pants everyone wore during those wondrous days of 1983.
With some education and some Janet Yellen Clipart (insert shameless finance joke here), expectations will change and things will get easier. As hard as it might be to stomach today, rising interest rates are a good thing. It means the economy is strengthening, job conditions are improving, and unemployment is going down. You’ve probably already noticed interest rates changing…mortgage anyone?
How does this impact financing rates we provide? The good news is that regardless of low or high rate environments, GreatAmerica plays down the middle of the plate. That means that when interest rates in the market are super low, we aren’t offering sub-zero percent financing. It also means that as interest rates climb, we aren’t going to be taking drastic measures like changing the finance rates on current deals, for approvals you already have, or on programs in place.
What we will do is be open and honest with each of the partners we work with. If there are changes to make, those will always be discussed one on one to best understand the pricing our partners are going to market with and how we can stay both competitive and profitable.
So what does this mean to you and your customers? Regardless of where they get funding, many customers are in a pay-less mindset. It is important for you to protect your deal size and margins against the tendency for customers to negotiate you out of a profit, and you can! Monthly payments are proven to reduce the amount of price negotiation, and when you do get objections, there are ways to ease your customers’ worries. If you are running into a lot of price objections, check out this webcast recording of how to address your customers’ objections!
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