If you just got a new motorcycle I’ll bet you are pretty confident that motorcycle finance is relatively easy to handle and you will be able to pay off the balance with no problem. Think again. In most cases, motorcycle loans are for 60 to 72 months depending on how much you were willing to pay per month when you signed on. That is 5 or 6 years. As it turns out, statistics show that most motorcycles are sold withing 2 to 3 years as the owners needs change or new models catch their fancy.
Something to think about is the fact that a new motorcycle depreciates in value quickly. Cars dip in value by 50% the second you drive of the dealers lot and the same goes for motorcycles. When you have a long term loan such as 60 months, 72 months, or longer, the value of the motorcycle becomes lower than the amount you are paying and therefore if you sell it after two or three years you will lose a significant amount of money. This scenario is even worse if you received your loan with no money down.
There are two types of personal loans you need to be aware of. The simple interest loan, and the pre-computed with rule of 78. With a simple interest loan you will pay off more interest in the beginning months of the loan but more of the balance as times moves forward. With the pre-computed loan you will pay the same percentage of interest to balance each month for the entire loan.
The simple interest loan calculates the amount of interest due each month separately. The amount of your monthly payment pays off that months interest first, the remainder then goes towards the principle. Therefore each month, as your principle decreases, so does the interest due and thus more of your payment goes towards the principle as time progresses.
The second type of loan is pre-computed with rule of 78. The number 78 can be confusing but in essence this means that the ratio of interest to balance being paid each month is consistent as opposed to paying more and more towards the balance as time progresses which is how the simple interest loan works. The number 78 comes from adding 1+2+3+4+5+6+7+8+9+10+11+12, equaling 78. Your first months interest is calculated by dividing 12 by 78 then multiplying that by the total interest owed. Second month you divide 11 by 78 times the total interest etc…
So, the better deal for your motorcycle loan would be a simple interest loan, especially if you plan to sell or trade it in after 2 or 3 years. This is because you will have paid more towards the balance of the loan and less interest. You will own more of the bike and that is a better situation to be in if you are selling it. Motorcycle finance is not that complicated if you know the lingo and carry a calculator in your leather.