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Motorcycle
Loans - Steps to Prevent You From Being
Caught Up
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by:
Jay Fran
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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 side down”?
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:
Motorcycle
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.
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