Since the depreciation of motorcycles is so huge after they are expelled from the showroom, the potential of a buyer who owes more on his motorcycle loan than the bicycle is worth it. Due more to his bicycle than it is worth, it is often referred to as the “upside down” world.
Many people who find themselves in this situation discover that financial lessons are sometimes the hardest and most expensive to learn. Loans for motorcycles over 48 months (especially without a down payment) place you in the position of duty more than the value of the bicycle.
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 calculations of primary interest, precalculated (combined with the rule of 78) and simple interest.
The precalculated interest combined with the Rule of 78, is usually the worst situation for a buyer because most interest is paid in the first 24 months. Therefore, in the first 24 months, a small part of the monthly payment was used to pay the capital. If a buyer wishes to sell or change the motorcycle within this period of time, it is likely that he will find himself owing more than the bicycle is worth. The statistics show that the average owner operates every 18-24 months.
On the other hand, the simple interest is much more favorable for the buyers, since the interests are accumulated in the balance of the loan. However, buyers who extend their loans for more than 48 months can still find simple interest. This is especially true if an initial payment is not made. The reason why this happens is that the motorcycle depreciates faster than the principal is paid; Let the balance owed to the lender be more than the bicycle can sell.
A common opinion that many people have is that they will only deliver their motorcycle to the lender if they are trapped in an “upside down” position. If you are considering this option do not do it! Your concerns do not just end after your bike is delivered or retrieved; in fact they are just beginning. The lender will sell your bicycle at auction for much less than it is worth. You still owe the difference between the amount you owe on your loan and the amount sold by the motorcycle at the auction. Therefore, if you owe $ 5000 and the bicycle sells for $ 1500, you are still responsible for owing the lender $ 3500. To make matters worse, the lenders can pay the high fees of the auction that you will also have to pay. . So, the net result is that you are now responsible for making monthly payments on a bicycle that you can no longer use.
So, what steps can you take to avoid being caught “top to bottom”?
1. Find a lender that uses a simple interest. Avoid lenders who use pre-calculated interest calculations / Rule of 78.
2. Always try to put money in your purchase.
3. Try to avoid motorcycle loans that extend beyond 36 months.