What You Need to Know about Motorcycle Installment Loans
When you are looking to purchase a motorcycle, you will discover multiple options for financing. One of the most popular choices is an installment loan. It is the same type of loan that is often used to finance a car and is normally safer than other types of motorcycle financing. While installment loans are generally safer than other types of financing, it’s important you understand how these loans work before you commit to one.
The goal of this article is to equip you with “industry insider knowledge” so you can ensure you get the best possible motorcycle financing terms, and don’t make mistakes when financing your motorcycle.
Promotion vs. Non-Promotion
There are two types of installment loans you can get when shopping for motorcycle financing.
- The first is promotional financing and this is normally offered by the manufacturer through a bank. It is called promotional because it offers a low promotional interest rate to entice people to buy.
- The second type is called standard financing (aka non-promotional) and does not have a low promotion interest rate.
Both standard and promotion financing are offered through motorcycle dealers.
Sometimes manufacturers will offer promotion financing with a customer cash rebate, but many times when the manufacturer offers a customer cash rebate, you will have to select between taking the customer cash OR low interest rate promotion financing.
This highlights a very important point when you are shopping for a motorcycle. You need to pay attention to how the manufacturer is advertising its promotion. Does the advertising communicate customer cash AND low interest rate financing? If so, you can ensure you will not have to select between getting customer cash OR low interest rate financing.
On the other hand, if the manufacturer is advertising an OR promotion, it will state customer cash OR low interest rate financing in the advertisement. In this situation, you will have to select between either customer cash OR promotion financing. In most cases, if you select the customer cash the manufacturer or dealer will have standard non-promotion financing to offer you. However, the interest rate will be higher than the advertised promotional financing interest rate.
Below is an example of how a manufacturer may communicate each promotion:
- Customer Cash AND Low Interest Rate Financing: Up to $1000 customer cash and financing as low as 3.99% APR upon approved credit.
- Customer Cash OR Low Interest Rate Financing: Up to $1000 customer cash or financing as low as 3.99% APR upon approved credit. (If you select customer cash, you will have to finance your purchase at a higher interest rate such as 9.99%.)
With an OR promotion it is important to decide which option is financially better for you. In order to do this you will have to use a motorcycle loan calculator to determine how much interest you will pay.
For instance, consider the situation where you have to select between two options to by a $10,000 motorcycle:
- Option 1: $1200 customer cash and 9.99% financing
- Option 2: $0 customer cash and 3.99% financing
Using a motorcycle loan calculator you can determine the interest difference between 9.99% vs 3.99%. In this case the interest on a 60 month $10,000 loan at 9.99% is $2,745 and the interest at 3.9% is $1,047.21. As you can see 3.99% saves you $1697.79 ($2,745 minus $1047.21 = $1,697.79). Since you have to take 9.99% to get the $1,200 customer cash back, you are better off taking 3.99% since the interest savings is $1,697, which is more than the $1,200 customer cash.
To decide which option is best, you will have to know how long the promotion lasts and compare the motorcycle financing rates and customer cash. The amount you save on interest during that time should equal or be more than the cash rebate if you want to select promotion financing.
Additional Installment Loan Terms
In addition to promotional or non-promotional, installment loans can be variable or fixed. It is important to know which type of loan you are applying for and here’s why.
Fixed loans have a rate of interest that will stay the same through the life of the loan.
Variable loans normally have a lower interest rate at the beginning of the loan, but then the rate rises after a certain period of time. Your monthly payments will also increase with a variable loan. Variable installment loans are not as common as fixed loans in the motorcycle industry, but some lenders use variable loans so make sure you ask before signing loan documents.
Simple Interest vs. Rule of 78
When you obtain a motorcycle loan, the interest rate will be calculated one of two ways:
- Option 1: Simple interest
- Option 2: Rule of 78
With the above two interest calculations, there is a vast difference in the total amount you have to pay if your loan is paid off early. With the simple interest method, your interest for each month is figured against the amount you owe for that month. For instance, if you have a loan for $10,000, your interest will be calculated on the full amount for the first month. Then, if you should pay $200 on the principle, the next month the interest would be calculated on $9,800.
The Rule of 78 is not as popular as it once was, but it is still in use in some states. With this method of calculating interest, the majority of your monthly payments will be applied towards interest in the beginning of the loan. It is not until the interest is almost paid that you begin to see much of a reduction in the principal. As a result with Rule of 78, if you decide to pay off your loan early you will discover that your payoff amount is much more than if your loan was calculated with simple interest.
Simple interest is always better then Rule of 78 since it reduces your loan principal balance faster. So be sure to check the detail of your loan and make sure it is simple interest.
What Manufacturers Offer Installment Loans
Most motorcycle manufacturers offer installment loans for consumers. Each manufacturer usually has some type of promotion running that includes an interest rate that is lower than what you would receive from your local bank. This encourages customers to buy with “limited time” offers.
The manufacturers include the following:
- Harley Davidson
How Your Annual Percentage Rate is Determined
Your Annual Percentage Rate or APR is not the same as the monthly interest rate you are charged. It is that rate along with any fees or other charges that you must pay to obtain the loan. The APR is the true amount that you pay on your loan and must be stated in writing. Everyone does not get the same APR. The rates are usually based on your credit history. While it may be partially tied in with your credit score, the lender will also look at other aspects of your credit.
This can include:
- Past payment history on credit cards and other bills
- Years of credit history
- Balance on revolving credit cards (aka revolving credit)
- Your new motorcycle loan payment compared to your income
- Your outstanding debt compared to your income (including your new motorcycle loan payment)
- Years of employment
Most lenders are abiding by new consumer laws. These laws require the lender to notify you if you are not accepted at the lowest rate. These documents should be part of your loan documents if you receive a higher rate than what is advertised. If these documents are not part of your loan documents make sure you ask the lender.
When financing a motorcycle, it is always best to have a plan before submitting your first finance application. Too many inquiries on your credit can hurt your credit score and end up damaging your chances of getting approved or impact the interest rate you are approved for. Each time you submit an application to a lender it puts a credit inquiry on your credit report. This can lower your credit score by 5 to 10 points each time.
Before submitting your first application, you need to have a clear picture of what type of financing you want and a copy of your current credit report & score. This will help you create a plan of action and prioritize the lenders you should submit applications too. It will also help set an order of priority for other lenders in case the first lender declines your application or does not give you good terms.
If you do have to submit multiple applications, do it in a short period of time and limit the number of credit applications you submit. Discuss with the dealership finance department which financing you prefer before an application is submitted. Make sure the finance manager knows your credit background and does not mass submit the application to all lenders. This will prevent unnecessary inquiries on your credit report.
Benefits of Installment Loans
The biggest benefit of installment financing is it puts restrictions on the lender for the life of your loan. You know upfront what your interest rate is and how much your monthly payment will be throughout the life of the loan. The lender has to abide by the agreement you enter since it is a contact.
On the other hand, credit card motorcycle loans don’t put the same restrictions on the lender. There is no contact involved and if you read the terms you will see lenders have some flexibility to change the interest rate that is charged. As a result, this makes installment loans the better choice for most people.
An installment loan is an even better deal if you can “lock in” promotional financing. For instance, if you can qualify for zero percent financing for 5 years, it eliminates the amount of interest you pay, and also reduces your monthly payment. For instance, on a $12,000 loan with a term of 60 months or five years, your monthly payment would be $200 with 0% interest. However, if you were paying 7% interest, you would pay a total of $2,256.86 in interest with monthly payments of $237.61. For an interest rate of 9%, your total paid in interest would be $2,946.02 with a monthly payment of $249.10.
Facts You Need to Know Before Getting Installment Motorcycle Financing
- Through dealers, most manufacturers regularly offer promotions for low interest rate financing.
- Installment loans are usually at a fixed rate for a certain number of months. For example, you may pay 3.99% interest for 60 months, which would make your payment $184.12 for a $10,000 motorcycle. To calculate your monthly payment on special deals, you can use a motorcycle loan calculator. This will help you determine what price of motorcycle you can afford.
- While most motorcycle installment loans carry a fixed rate with a fixed payment, some banks may offer a variable interest loan with payments that will change. Make sure to ask the dealership finance manager about your loan before you accept it.
- Installment loans are generally secured loans; this means that the lender will also be the lien holder on your title. If you should not be able to make the payments at any point during the loan, the lender could repossess your motorcycle.
- While most lenders do not use Rule of 78 in the motorcycle industry, you want to make sure before you sign the documents. Some states still allow Rule of 78. Ask the lender before you sign loan documents. Not all loan contracts use the word Rule of 78 on the actual contract. A loan that talks about interest refunds or rebates is probably a Rule of 78 loan.
- Don’t forget to figure in the cost of insurance when calculating your budget to determine how much you can afford. Most banks require full coverage insurance for any motorcycle financed. If you plan only to carry liability coverage, you will need to review the lender’s terms before you commit to a loan. You should also compare insurance rates prior to purchasing.
- Review your credit before applying for an installment loan. Make sure everything listed is accurate. Also, pay down balances on credit cards to obtain the best interest rate for your loan.