Welcome To The World Of "Upside Down" Motorcycle Loans!
With the depreciation on motorcycles being so enormous after they are pushed off the showroom floor, the possible 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 occurrence.
First, the interest calculation your lender uses can make a big difference in your situation, especially in the first 18 months. There are two dominant 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. consequently, 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 however, is much more popular for buyers since interest accrues on the balance of the loan. However, buyers that extend their loans for greater than 48 months can nevertheless 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 shared 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 nevertheless 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 nevertheless are responsible for owing the lender $3500. To make it worse lenders may tack on hefty auction fees which you will owe in addition. So the net consequence 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 buy.
3. Try to avoid motorcycle loans that extend past 36 months.