Motorcycle Loans Explained: What to Expect When Financing a Motorcycle

Future motorcycle owners may not know what to expect when it comes time to finance their pending motorcycle purchase. Like with any large purchase involving a loan, buyers should either learn about motorcycle loans in advance or have motorcycle loans explained to them before they sign on the dotted line.

What to Know Before Applying for a Motorcycle Loan

As with many types of loans, lenders heavily rely on credit scores to help determine the creditworthiness of loan applicants. Consumers should check their credit before they plan to purchase a motorcycle in order to prepare their credit for a motorcycle loan application.

In order to get the best possible rates, a buyer's credit should be rated as excellent which is generally defined as a score of 720 or higher. If a consumer's score is below 720, they should be prepared to pay more in interest over the life of the loan. Alternatively, consumers can work to raise their credit score before applying for motorcycle financing to save money on interest payments. You can check your credit score for free using My LendingTree.

Types of Motorcycle Loans

There are two general types of motorcycle loans. Buyers can obtain a secured installment loan either through the motorcycle dealership or through an outside lender. Private label credit card loans, which are generally considered riskier than installment loans, may be another option offered by some motorcycle dealerships or manufacturers.

Secured Installment Loans

Secured installment loans are repaid over a set time period, such as 36 or 60 months, and require a defined monthly payment. Most consumers are familiar with this loan option as cars are often financed using this method.

The secured installment loan will use a purchaser's motorcycle as collateral in order to reduce the risk to the lender. If a motorcycle buyer defaults on their loan, the lender may repossess the motorcycle to try to recover the amount of debt outstanding on the loan. This extra level of security may result in a lower interest rate than other financing options.

Private Label Credit Card Loans

Some motorcycle manufacturers or dealerships will offer private label credit card loans as a type of financing. Essentially, these loans are unsecured which means the buyer's motorcycle will not be used as collateral. The unsecured feature of the loan means the lender will take on more risk if the buyer defaults on the loan as they cannot easily repossess the motorcycle.

Due to the higher risk, private label credit card loans often come with higher interest rates. In addition, these loans will often have high penalty interest rates if a payment is made late or missed altogether.

Occasionally, motorcycle manufacturers and dealerships will offer special financing rates on private label credit card loans that seem very attractive. Consumers should have these motorcycle loans explained to them in great detail as they have many complex pieces that change from loan to loan. Failure to follow the requirements will almost always result in paying much more money in interest over the life of the loan than the advertised promotional rate.

What to Watch Out for at the Dealership

The purchase of a motorcycle is a large financial decision that will likely have major implications on a buyer's finances for years to come. Unfortunately for the buyer, motorcycle dealerships see each motorcycle sale as a small transaction on their way to higher profits. As such, motorcycle dealerships will generally do everything they can to make the most money possible on each motorcycle sale, including earning a commission on financing options.

Many dealerships earn kickbacks from lenders if they convince buyers to sign a loan with a higher interest rate than the buyer qualifies for, according to the Center for Responsible Lending. For instance, a buyer may qualify for a 3.99 percent interest rate loan, but the dealership instead could sell that buyer a 8.99 percent interest rate loan. The dealer gets a kickback which helps improve their profitability and the buyer ends up paying more in interest payments for the life of the loan.

Due to these shady practices, it is imperative that buyers research what loan rates they qualify for at competing financing institutions before they apply for financing through a dealership. If the buyer can show a lower rate from an outside lender than what the dealership is offering, the power shifts to the consumer when it comes to negotiating the financing terms of any dealership offers.

Buyers can easily overlook important financing details when they get caught up in the excitement of buying their motorcycle. Instead of hurrying to ride their motorcycle off the lot, consumers should make sure to have the dealership's motorcycle loans explained to them in terms they understand. Then, after comparing the dealership financing offers to outside lender offers, the buyer should pick the best loan for their particular situation.

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