With the depreciation on motorcycles being so high after they are driven out of the showroom, the potential for a motorcycle buyer owing more on their motorcycle loan than the motorcycle is worth it very high. Owing more on your motorcycle than it is worth is often referred to as the being upside down.

Many people finding themselves in an upside down situation discover that financial lessons are sometimes the hardest and most expensive to learn. Motorcycle loans of more than 48 months (especially without a down payment) can put you in the position of being upside down and owing more for your motorcycle loan than the value of your motorcycle.

Let's take a look at common reasons people find themselves upside down.

First, the motorcycle loan interest calculation your lender uses can make a big difference in your situation, especially in the first 18 months of the loan. There are two primary interest calculations: pre-computed (combined with rule of 78) and simple interest.

Pre-computed interest combined with Rule of 78, is typically the worst possible situation for a motorcycle buyer because most of the interest is paid in the first 24 months. As a result, in the first 24 months little of the monthly motorcycle loan payment has gone towards paying down principal. If a motorcycle buyer wishes to sell or trade in the motorcycle within this timeframe it is likely they will find themselves owing more than the bike is worth. Statistics show that the average motorcycle owner trades in their motorcycle every 18-24 months.

Simple interest on the other hand, is much more favorable for motorcycle buyers since interest accrues on the balance of the loan. However, motorcycle buyers that extend their loans for greater than 48 months can still find themselves upside down with simple interest. This is especially true if a down payment is not made. The reason this occurs is that the motorcycle depreciates faster than the principal is paid; leaving the balance owed to the motorcycle lender to be more than the bike can be sold for.

A common view that many people have is that they will just surrender their motorcycle to the lender if they are caught in an upside down position. If you are considering this option don't! Your worries do not just end after your motorcycle is surrendered or repossessed; in fact they are just beginning. The motorcycle lender will sell your bike at an auction for much less than it is worth. You will still owe the difference between the amount you owed on your motorcycle loan and the amount the motorcycle sold for at auction. So if you owe $5000 and the motorcycle sells for $1500, you are still responsible for owing the motorcycle lender $3500. To make it worse motorcycle lenders may tack on hefty auction fees which you will owe as well. So the net result is that you are now responsible for making monthly payments on a motorcycle you can no longer ride.

So what steps can you take to prevent from being caught upside down?

-Find a lender that uses simple interest. Avoid lenders that use pre-computed / Rule of 78 interest calculations.

-Always try to put money down on your purchase.

-Try to avoid motorcycle loans that extend past 36 months.

While these tips can help you from being caught upside down motorcycle buyers should be aware that all motorcycles depreciate at different rates. Therefore, before buying your motorcycle it is always advisable to check the used values of the model you are interested in. This will assist you in seeing how fast a new model may depreciate once it is driven from the showroom.

About the author:

Jay Fran is a successful author and publisher at Motorcycle-Financing-Guide.com, a comprehensive resource on bad credit motorcycle financing, motorcycle loans, high risk motorcycle loans and online motorcycle buying tips.

Copyright (c) 2005, by Jay Fran. This article may be freely distributed as long as the copyright, author's information and the below active live link is published with the article.

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