As interest rates rise, dealership groups might consider using a hedging tool to keep payments manageable.
The tool, called a swap, is an agreement between a dealership and its lender that allows the dealership to swap a floating interest rate for a fixed rate, or vice versa, for an agreed-upon period.
Some dealership groups, including at least one of the publics, have swaps in place to secure a fixed rate as rates climb.
With swaps, “you’re basically hedging your bets,” said Robert Davis, partner at accounting firm Dixon Hughes Goodman.
The floorplan agreement follows a benchmark interest rate, and a swap contract ensures that the dealership pays only the fixed rate, even if the benchmark interest rate exceeds it, Davis said. If the fixed rate exceeds the benchmark rate, however, the dealership pays the fixed rate and eats the difference.
For example, if a dealership locks in a rate of 5 percent, and the benchmark interest rate is 6 percent, the store would still only pay 5 percent. But if the floorplan interest rate is 4 percent, the store must still cover the fixed 5 percent.
Jodi Kippe, managing partner for the retail dealer services group at accounting firm Crowe, said that during the recession, swaps generally fell out of favor with dealers. The interest rate was low, and dealerships that agreed to a higher fixed rate with a swap had to pay the difference.
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