Motorcycle Loans: How to Avoid Being Upside Down

Understanding Motorcycle Depreciation

Motorcycles, like cars, lose value the moment they leave the showroom floor. According to the Motorcycle Industry Council, the average motorcycle depreciates by 20-30% in the first year alone. This rapid depreciation can quickly lead to a situation where the loan balance exceeds the bike's market value.

The Impact of Loan Terms

Interest Calculations

The type of interest calculation your lender uses can significantly affect your financial situation, particularly in the first 18 months of the loan.

Pre-Computed Interest and Rule of 78

Pre-computed interest, often combined with the Rule of 78, is generally unfavorable for buyers. This method front-loads the interest payments, meaning that most of the interest is paid in the first 24 months. Consequently, very little of your monthly payment goes towards reducing the principal during this period. Given that the average motorcycle owner trades in their bike every 18-24 months, this can lead to an upside-down loan situation.

Simple Interest

Simple interest is more favorable for buyers as it accrues on the remaining loan balance. However, even with simple interest, extending your loan term beyond 48 months can still result in an upside-down loan, especially if no down payment is made. The motorcycle's depreciation rate often outpaces the rate at which the principal is paid down.

The Consequences of Repossession

Some people consider surrendering their motorcycle to the lender if they find themselves upside down. However, this is not a viable solution. When a lender repossesses your bike, it is typically sold at an auction for much less than its market value. You will still owe the difference between your loan balance and the auction sale price, plus any additional auction fees. For example, if you owe $5,000 and the bike sells for $1,500, you will still owe $3,500, plus fees. This leaves you making payments on a bike you no longer own.

Steps to Avoid Being Upside Down

1. Choose the Right Lender

Opt for a lender that uses simple interest calculations. Avoid lenders that use pre-computed interest or the Rule of 78.

2. Make a Down Payment

Always try to put money down on your purchase. A down payment reduces the loan amount and helps mitigate the risk of becoming upside down.

3. Limit Loan Terms

Try to avoid motorcycle loans that extend past 36 months. Shorter loan terms mean you pay off the principal faster, reducing the risk of depreciation outpacing your loan balance.

Interesting Stats

• According to Experian, the average motorcycle loan term in the U.S. is 60 months, which increases the risk of being upside down.
• The average interest rate for a motorcycle loan is around 6.5%, but this can vary significantly based on credit score and loan term (Source: Bankrate).

Conclusion

Being upside down on a motorcycle loan can be a financially precarious situation. By understanding the impact of depreciation, choosing the right lender, making a down payment, and opting for shorter loan terms, you can significantly reduce the risk of owing more than your bike is worth.

For more information on motorcycle loans and financial advice, visit Motorcycle Industry Council and Bankrate.

This article is based on information available as of 2023 and is intended for educational purposes. Always consult with a financial advisor for personalized advice.