AVOID BECOMING UPSIDE-DOWN ON YOUR MOTORCYCLE LOAN
New motorcycles depreciate in value the instant
they are driven out of the showroom into the street. This often
results in buyers utilizing financing for their purchase
becoming up-side-down on their loan. This means that they owe
more for their bike than the bike is actually worth.
Unfortunately, many consumers learn what the phenomena of being
upside-down is only after they have experienced it for
themselves. Typically, motorcycle loans that are longer than 48
months (especially without a down payment) will put consumers in
the situation of owing more than their bike is worth.
The type of interest calculation your lender uses will make a
tremendous difference in pre-determining the possibilities of
falling into this financial rut. There are two primary interest
calculations, simple interest and pre-computed (combined with
rule of 78).
Simple interest is more favorable for buyers since interest
accumulates on the balance of the loan. However, it is still
possible for buyers that extend their loans for more than 48
months to become upside-down with simple interest. This is
likely to occur if no down payment is made. The reason this
would happen is that the bike depreciates quicker than the
principal is paid, resulting in the balance owed to the lender
to be greater than the motorcycle can be sold for.
Pre-computed interest combined with Rule of 78, is usually a less
favorable situation for buyers since the majority of interest is
paid in the first 24 months. As a result, a very small amount of
payments go towards paying down principal in the first 24
months. If a buyer wants to trade-in or sell their motorcycle
during this timeframe, they will probably find themselves owing
more for the motorcycle than it is worth. It is important to
note that statistics show that the average owner looks to trade
in their motorcycle every 18-24 months.
A common practice by people caught in an upside-down situation
is to surrender their bike to the lender. This is not a smart
idea. Your problems are not going to disappear when your bike is
repossessed or surrendered. First, the lender will sell your
bike at auction for much less than what it is worth. You will
still be responsible for the difference between what the bike
was sold for and what you owe. For example, suppose you owe
$7,000 and the bike sells for $2,000, you are still responsible
for $5,000. You will also be obligated to pay all of the fees
associated with the auction! Do you really want to make payments
for a motorcycle that you no longer own?!
To avoid becoming up-side down on your loan, consider the
Apply for a new motorcycle loan with a lender that utilizes
simple interest. All of the financing programs Motorcycle Loan
Center provides are simple interest.
- Try and leave a down payment on your bike of at least 15%.
- Avoid financing a bike for more than 36 months.
By following the input above, not only will you avoid becoming
upside down, you will also receive lower interest rates and save
money as a result. You can learn more about
motorcycle loan rates.
**If you are buying a new motorcycle, you should think about
buying a gap insurance policy for financial security.
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