Insider RV Financing Secrets |
By Barry Wilder |
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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. |
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