Steps To Assist Motorcycle Buyers Avoid Upside Down Motorcycle Loans!

With a new motorcycles depreciation being so high shortly after it is driven away from the dealer, the potential for a motorcycle buyer owing more on their new motorcycle loan than the motorcycle is worth is quite high. Most people label owing more on your bike than it is worth as the world of upside down.

Many people that discover themselves in this situation discover that financial lessons are sometimes the hardest and most expensive to learn. Motorcycle loans that extent for long terms of more than 48 months put you in the position of owing more than the value of the bike. This is especially true in the early years of the motorcycle loan since the bike depreciates so quickly after is leaves the dealership showroom.

In order to understand this catch 22 scenario let’s take a look at this phenomenon.

First it is important to understand that the way your lender calculates interest charges can make a big difference in you becoming upside down, especially in the first 18 months of your motorcycle loan. Typically lenders use two primary types of interest calculations: pre-computed (sometimes called rule of 78) and simple interest.

Typically the worst situation for a buyer is to enter a motorcycle loan with the pre-computed Rule of 78 interest calculation because most of the interest is pre-computed so that it is paid in the first 24 months of the loan. As a result, in the first 24 months of loan payments little of the monthly payment is going towards paying down the principal on the loan. Therefore, if a motorcycle buyer wishes to sell or trade in the motorcycle within the first 24 months then they will likely find themselves owing more than the motorcycle than it is worth in the used motorcycle market. Industry statistics show that the average owner trades in their motorcycle every 18-24 months.

On the other hand simple interest, is much more favorable for buyers since interest accrues on the balance of the loan versus being pre-computed upfront. However, buyers should be aware that extending their loans for terms greater than 48 months can still can them to become up side down with a simple interest motorcycle loan. This is especially true when the motorcycle buyer does not make a down payment on the purchase. The reason the buyer may become upside down as the term increases is that the motorcycle depreciates faster than the principal is paid on the loan. This leaves the balance owed to the lender to be more than the bike can be sold for as a used motorcycle.

The following tips can help you prevent from being caught “up side down” with your motorcycle loan? However beware that if you have a model of motorcycle that depreciates faster than the average than your chances of being caught up side down are increased.

1. Avoid buying a motorcycle model that the manufacturer may be fazing out so that a new more advanced model sold in the next model year. When manufacturers make major design updates on a model it will cause the older used models in the marketplace to depreciate quicker

2. Always try to use a down payment when you get a motorcycle loan.

3. Avoid motorcycle lenders that use pre-computed / Rule of 78 interest calculations. Read your motorcycle loan contract to ensure it is not pre-computed interest.

4. Try to avoid motorcycle loans that extend for terms that are greater than 36 months.

5. Find a motorcycle lender that uses a simple interest calculation.

Copyright (c) 2005, by Jay Fran. This article may be freely distributed as long as the copyright, and below author's information and the below active live link with anchored text is published with the article.