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Rethink Long-term Borrowing Strategies

Rethink Long-term Borrowing Strategies
Two economists suggest management strategy.

Variable-rate loans or loans with a fixed rate for a relatively short period that then turns into a variable rate have served many people well over the past decade. A period of low interest rates have kept rates reasonable to cheap, even when variable rates were in play. A pair of Purdue university ag economists suggest that play may no longer be a smart move in the future. The future could arrive in 12 to 24 months.

The entire chain of logic leading to their conclusion is complicated. Suffice it to say it has to do with repercussions of the bailout of banks and current attitudes toward lending by bankers. Basically, they've turned conservative and aren't making nearly as many loans as in the past.

"If nothing is done, we would see inflation rates as high as 13% within the next few years," says Allan Gray, Purdue Extension economist. "I'm not predicting that. In fact, I don't think it will happen, because the Feds will take action to slow down inflation before that happens."

The problem, adds Mike Boehlje, also a Purdue Ag economist, is that if the Feds raise interest rates too fast to halt inflation, they could put the tentative recession into a tailspin. That's not likely to happen either, both agree.

However, both also agree that interest rates will likely go up some. That could start happening after the next 12 months, Boehlje says. While neither wants to make hard and fast projections, they're confident enough that the situation will swing back that direction that it ought to affect a shrewd manager's thinking as he reviews and projects what's best for his business.

"We're saying that this ought to be part of your management strategy going forward," Boehlje says. "How are you going to handle your financial debt if interest rates for loans increase?"

One option would be to take another look at how much debt you have tied up either on variable rate loans, or loans that are fixed now, but which will become variable rate loans. It's possible that in some cases, a wise strategy for certain individuals could be trying to convert more of that debt to long-term loans at reasonable rates available now.

One problem may be finding someone to make long-term loans. Many banks are just not in the mood to lend long-term money, Boehlje notes. He suggests checking with traditional ag lenders to see who might be willing to make such a loan.   

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