Only 3% interest! Only $100 a month! These are very attractive numbers when buying a new motorcycle. It makes it easy to justify to yourself and others. However, there are long term implications with these loans. We’re not going to convince you against these loans, we would just like to see riders pay a little more attention to them. Motorcycling is expensive (worth it!) and being smart about where your hard earned dollars go, helps immensely.
Most people do not have $5000, $10000, or more saved up to buy the motorcycle of their dreams. Getting a motorcycle loan makes it very easy. First let’s look at the basic numbers you are getting into. The following are real examples.
Yamaha FZ07
Regular Price: $7,299.00
Price: $6,299.00
Dealer’s prep and freight: $665.00
Total w/Fees $6,964.00
Finance it for $154.00 per month for 60 months at 3.89% with nothing down.
Total loan value is $8,384. There is 12% tax in here of $835.68. There also might be other fees. Great bike, good price. $154 per month is very manageable. Interest rate is decent and no money down! Let’s do some quick math. $154 x 60 months is $9,240. That puts the interest costs at $856 ($9,240 minus $8,384).
Yamaha FZ07
$8,384 Total Cost
$0 down payment (you)
5 year term/60 months
$154 monthly payment
$856 total interest costs
Now, if it sounds a little confusing at this point that is ok. What we want to do here is minimize the costs where we can. First off, try to put some money down. Unless you have a really good reason to hold onto the money, put some money down. Keeping it in your bank account is not a good enough reason. We want to reduce interest costs and the length of the loan (amortization) if possible. Second, go for a shorter loan term. Instead of 5 years, how about 3 years? This reduces the interest costs by half!
Let’s take a look at the new loan for the same bike
Yamaha FZ07
$8,384 Total Cost
$1,500 down payment (you)
3 year term/36 months
$203 monthly payment
$423 total interest costs
A loan structured like this should not be too difficult too achieve. These are very small changes for a very beneficial differences. Do your due diligence when committing to buying motorcycles or larger priced items. A small amount of work can make a big difference.
Here are some alternative ways to pay for your motorcycle;
If you are going to go to a bank. Do not ask for a loan for the entire purchase price. They will turn you down or give you unfavorable terms. You will need to have 33% to 50% of the purchase price in order to get a good loan for the bank. These are considered high risk loans for the bank so they are not as interested in these loans (versus a mortgage, eg). By putting money up for the purchase you are showing them you are most committed and serious. The loan terms will be better for you.
Do you have a line of credit? If so great! If not ask for one. When they ask why you want it, tell them you would like to have access to a line of credit for emergency purchases and flexibility. They should grant you a line of credit of around $5,000 with an interest rate of prime + 2-4%. This is ok. What is great about a line of credit is you can pay it off as quickly as you can which reduces interest costs. What is terrible about a line of credit is how easily abused it can be. In my 12 years of financial planning I saw far more abuse than responsibility when it come to using a Line of Credit. Discipline is required.
Once you have your loan figured out and you have signed the documents. Enjoy your motorcycle and try to pay that loan off earlier. The quicker you pay the loan off the better off you will be when you go to sell it. Most motorcycle riders change bikes every 2-3 years. Don’t get caught with a motorcycle loan that exceeds the value of your bike when you are ready to sell!
If you have any questions about motorcycle loans and planning please ask us. At 1st Gear Motorcycles we are committed to teaching you how to ride but also how to do it in a cost effective manner as well. Ride Safe!