Insider RV Financing Secrets
Choosing a Loan Term - When More is Less
Many people who contemplate financing an RV, or any other
high-ticket item such as a boat or private aircraft, are
intimidated by the length of the financing term needed for an
acceptable payment. Typical financing terms are 10 to 20 years,
with 15 years being the most common.
Some consumers choose a shorter financing term and a higher
payment simply because of their fear of the longer-term
commitment. Even though they obviously know RV owners rarely, if
ever, keep an RV for the entire term of their financing; they
choose a shorter loan term. They unnecessarily strap themselves
to a higher payment that could strain their budget - should
illness, unemployment or other hard times take place.
Most buyers choose the longest term available to secure the
lowest payment possible - even though they could afford much
more. They pay more interest than principal during most, if not
all of their acutal loan period, and wind up in an "upside-down"
position.
In other words, the remaining payoff on their loan is much more
than the actual value of their unit when the time comes to trade
or sell their RV.
A Hybrid System
Savvy RV buyers use a "Hybrid" type of financing system to get
the best of both worlds. They finance the RV for the longest
term available for the loan amount, which makes the payment
lower than they can actually afford.
During the loan, they make the monthly payment PLUS an
additional amount, which is directly subtracted from the
principal amount of the loan.
When this approach is followed with discipline, it can lower the
"effective" interest rate to as much as half the original rate -
as well as dramatically shortening the length of the loan term.
It also allows the most flexibility. Should the borrower face a
situation where times are rough or money is tight, they still
have the luxury of making the lowest payment possible.
An Example of a $50,000 Loan
Interest Rate - 6.25%
Term in Years - 15 years
Payment Amount - $428.71
Total Interest Paid - $27.167.80
If this person added $50 to each monthly payment, he would
change the repayment terms to:
Effective Interest - 5.64%
Loan Term in Years - 12 years
Total Interest Paid - $18,927.20
TTL Interest Savings - $8,240.60
Now lets assume that this person added $150 to the monthly
payment.
Effective Interest - 2.66%
Loan Term in Years - 8 years
Total Interest Paid - $5,556.17
TTL Interest Savings - $21,611.63
What's the Bottom Line?
Comparing our last example of a consumer applying a hybrid
system - to an individual who took out an 8-year loan upon
purchasing the same RV... The hybrid system would have saved
nearly 4% in interest over an actual 8-year loan term.
By shortening your loan term from 15 years to roughly 8 years,
he would have saved over $21,000 in interest. He has also
reduced the "effective" interest rate to less than 3%.
Plus, the buyer has paid off a 15-year loan in about 8 years!
Even if he misses a few months of additional principal payments,
he will still have saved thousands of dollars in finance charges.
The additional $150 per month added to principal has saved about
$78 per month over choosing an 8-year initial loan term. That
equates to about $7,500 savings in payment amount over the
course of the loan.
What if I Don't Make the Additional Payment?
The key to making a hybrid payment system work - is discipline.
You must make the additional principal payment every month, or
very close to it. You should be certain your scheduled payment
amount plus any additional amount you plan to add toward
principal is within your budget.
Even if you intend to use a hybrid payment system, but never add
an additional penny towards principal - you will have simply
paid off your loan in the same manner the majority of RV buyers
choose.
Barry Wilder