You’ve had your eyes on a particular motorcycle for some time. You can’t wait to make it yours and take it for a stroll on the open road. But before you strike up a deal with the seller, you’ll need to arrange financing. Not all motorcycle loans are the same, though. So, it’s important that you prepare your finances to ensure you get a good rate and affordable monthly payment on your motorcycle loan.
What is a Motorcycle Loan and How Does It Work?
A motorcycle loan is a debt product that lets you borrow money from a lender to purchase a motorcycle, so you won’t have to pay out of pocket. You’ll make monthly payments to the lender for principal and interest over a set period, also known as the loan term.
There are two types of motorcycle loans to choose from – secured and unsecured. Secured motorcycle loans generally offer lower interest rates because they use the motorcycle as collateral. In turn, they pose less risk for the lender since your motorcycle can be repossessed if you default on the loan agreement. You may also be required to make a down payment to take out a loan.
Unsecured motorcycle loans do not require you to put the bike up as collateral. Instead, the lender will evaluate your creditworthiness to determine if you’re a good fit for financing. You can expect to pay a much higher interest rate to offset the risk assumed by the lender. But unlike secured motorcycle loans, there are no down payment requirements.
Understanding Motorcycle Loan Rates and Monthly Payments
Motorcycle financing makes it easier to buy a motorcycle, but a loan comes with rates and monthly payments. You’ll first have to get credit approval to receive loan offers. Many lenders have minimum credit score requirements they use to decrease the risk of applicants who end up defaulting on their loans. It’s common for lenders to look at each borrower’s credit history and annual income before determining the loan’s rate and terms.
An avid biker with excellent credit can end up securing great rates for their loan. It’s common for borrowers to opt for a fixed-rate motorcycle loan to keep monthly payments stable, but some people choose variable-rate motorcycle loans instead.
It only takes a few minutes to go through the loan application process. You will have to provide personal information like your home address and Social Security Number to submit an application.
Once you get approved and buy your ride, you will have to make monthly motorcycle loan payments. You get to choose the term length. Shorter terms result in higher monthly payments, while longer terms have lower monthly payments. Once you make all of the monthly payments within the term, you become debt-free on the auto loan.
Some people use personal loans to get financing. A personal loan is an unsecured loan since it does not use your dirt bike as collateral. Some motorcycle loans use the vehicle as collateral, which means the lender can take ownership of the vehicle if you fall behind too many payments.
Motorcycle Loans vs. Car Loans: How Are They Different?
Motorcycle and car loans are both installment loan products that come with fixed interest rates. However, they typically have lower limits than car loans since the average price of a motorcycle is far lower. You’ll also pay a higher interest rate than expected for a motorcycle loan since the likelihood of falling behind on loan payments is much greater.
Factors Affecting Motorcycle Loan Rates and Monthly Payments
Several factors affect how much you’ll pay each month for a motorcycle loan. These are the highlights.
Credit Score
Lenders will review your credit score before giving you a loan. This three-digit number impacts your annual percentage rate. Lenders view borrowers with high credit scores as less risky, resulting in higher loan amounts and lower APRs. Building your credit score leading up to a loan application can help you get better terms for your vehicle.
Loan Term Length
A longer-term will reduce your monthly payments but keep you in debt longer. Borrowers with more financial flexibility may want to opt for shorter terms to get out of debt sooner.
Down Payment Amount
Pulling into your savings account to make a higher down payment will lower your monthly motorcycle payments and result in more flexible terms. You can put zero money down for motorcycle financing, but you will end up with higher monthly payments and possibly a higher APR.
Type and Age of the Motorcycle
Older motorcycle models usually receive higher interest rates, and not every financial institution will approve your loan application for an old vehicle. A luxury motorcycle will also command a higher interest rate since it’s riskier for the lender. New motorcycles that aren’t luxury brands usually get more favorable treatment. The same rules apply to boats, ATV rides, and other recreational vehicles.
Lender’s Criteria
Many financing options come with minimum credit score and debt-to-income ratio requirements. Some lenders have very few requirements but tend to have high rates.
Other Costs and Fees
Before you submit loan applications for a new bike, you should consider these costs and fees.
Prepayment Penalties
If you are refinancing your existing motorcycle loan, you will likely have to cover prepayment penalty fees. You can take this extra cost to the backend of your current loan. It’s also good to keep this fee in mind if you are getting your first motorcycle loan in case you need to refinance in the future.
Origination Fees
Each lender will charge an origination fee that gets added to the loan’s balance. You can also opt to pay this fee right away so interest doesn’t accumulate. Origination fees are common for many types of loans.
Insurance Requirements
You may have to get gap insurance if the market value of your motorcycle is less than the loan’s balance. You’ll have to continue paying gap insurance premiums until you get out of debt or your loan balance is less than your motorcycle’s value. The latter scenario can only happen if you put more money into your loan since motorcycles do not gain value over time.
Comparing Motorcycle Loan Rates
The actual rate you receive partially depends on where you go to get rates. You may get a discount if you shop around at the right places. Here’s how motorcycle rates look across the board.
Banks vs. Credit Unions
These financial institutions usually have the most competitive rates for vehicle loans. You can find low rates from these entities, but it’s also more difficult to get secured loans from them. Banks and credit unions tend to have higher credit score requirements.
Dealership Financing vs. Personal Loans
Dealership financing is easier for people to get even if they don’t have good credit. However, you may get better rates and terms with a personal loan. Rates vary considerably with personal loans, but people with the highest credit scores tend to get the lowest rates. The vehicle model year also plays a role in your rate.
Online Lenders vs. Traditional Lenders
You can find competitive rates if you use online banking or traditional banking to get financing. You’ll find plenty of variety with each option, as some of them cater to people who have bad credit.
What is a Good Rate for a Motorcycle Loan?
It depends on your creditworthiness, but well-qualified borrowers secure motorcycle loans with low interest rates. It is ideal that you have good or excellent credit and opt for the shortest loan term to qualify for a competitive rate.
Common Requirements for a Motorcycle Loan
Credit Score
Your credit score heavily affects the cost of borrowing. If you have a strong credit score, you could qualify for the best interest rate the lender offers. But if your score is on the lower end, expect to pay more in interest or be denied financing altogether.
Credit History
Lenders also analyze your credit history to determine if you’ve responsibly managed debt accounts over time. Recent credit issues could raise red flags and lead to a higher interest rate or loan denial.
Debt-to-Income Ratio
As the name implies, this is the percentage of your income spent on monthly debt payments. If it’s too high, lenders may be reluctant to give you a motorcycle loan out of fear that you’ll have trouble making timely monthly payments.
Down Payment
Down payments aren’t required on unsecured motorcycle loans. However, some lenders who offer secured loans require down payments from certain borrowers.
Condition and Price of the Motorcycle
The motorcycle’s age and condition also play a role in what you’ll pay in interest. New motorcycles come with lower interest rates than older bikes despite the difference in the price tag. However, a used motorcycle with an older model year in subpar condition may come with a higher interest rate.
Three Ways to Finance Your Motorcycle
1. Manufacturer Financing
You could qualify for manufacturer financing on a motorcycle if you buy it from the dealership. For example, BMW and Harley-Davidson Financial Services have in-house financing available to qualified borrowers.
2. Personal Loan
A personal loan is another option to finance your motorcycle. Some lenders offer same-day approvals, and you can use the loan proceeds however you see fit. The downside is that the interest rates aren’t always the lowest, and loan terms are usually between three to five years. Consequently, you may get monthly loan payments that stretch your budget too thin.
3. Motorcycle Loan
Online motorcycle loans are rapidly emerging as a common financing option. You can get the funding you need instantly from an online lender without having to visit a physical branch of a bank or credit union, and the interest rates are competitive.
