Motorcycle Loans - Steps To Prevent You
From Being Caught Up Side Down
by Jay Fran
With the depreciation on motorcycles being so enormous after
they are driven off the showroom floor, the potential for a
buyer owing more on their motorcycle loan than the bike is worth
it quite high. Owing more on your bike than it is worth is often
referred to as the world of "up side down".
Many people finding themselves in this situation discover that
financial lessons are sometimes the hardest and most expensive
to learn. Motorcycle loans of more than 48 months (especially
without a down payment) put you in the position of owing more
than the value of the bike.
Let's take a look at this phenomenon.
First, the interest calculation your lender uses can make a
big difference in your situation, especially in the first 18
months. There are two primary interest calculations, pre-computed
(combined with rule of 78) and simple interest.
Pre-computed interest combined with Rule of 78, is typically
the worst situation for a buyer because most of the interest
is paid in the first 24 months. Therefore, in the first 24 months
little of the monthly payment has gone towards paying down principal.
If a buyer wishes to sell or trade in the motorcycle within
this timeframe they will likely find themselves owing more than
the bike is worth. Statistics show that the average owner trades
in every 18-24 months.
Simple interest on the other hand, is much more favorable for
buyers since interest accrues on the balance of the loan. However,
buyers that extend their loans for greater than 48 months can
still find themselves up side down with simple interest. This
is especially true if a down payment is not made. The reason
this occurs is that the motorcycle depreciates faster than the
principal is paid; leaving the balance owed to the lender to
be more than the bike can be sold for.
A common view that many people have is that they will just surrender
their motorcycle to the lender if they are caught in an "up
side down" position. If you are considering this option
don't! Your worries do not just end after your bike is surrendered
or repossessed; in fact they are just beginning. The lender
will sell your bike at an auction for much less than it is worth.
You will still owe the difference between the amount you owed
on your loan and the amount the motorcycle sold for at auction.
So if you owe $5000 and the bike sells for $1500, you still
are responsible for owing the lender $3500. To make it worse
lenders may tack on hefty auction fees which you will owe as
well. So the net result is that you are now responsible for
making monthly payments on a bike you can no longer ride.
So what steps can you take to prevent from being caught "up
1. Find a lender that uses simple interest. Avoid lenders that
use pre-computed / Rule of 78 interest calculations.
2. Always try to put money down on your purchase.
3. Try to avoid motorcycle loans that extend past 36 months.
Copyright (c) 2005, by Jay Fran This article may be freely distributed
as long as the copyright, author's information and the below
active live link with anchored text is published with the article:
Loans, Bad Credit Motorcycle Loans, Motorcycle Loan Guide
About the Author
Jay Fran is a successful author and publisher at http://www.motorcycle-financing-guide.com.
A comprehensive resource on how to have the best experience
and get the best deal on motorcycle financing, bad credit motorcycle
loans, high risk motorcycle loans and motorcycle buying.