When buying a new motor vehicle, whether car, truck or motorcycle, the moment it leaves the dealership's lot the vehicle normally begins to depreciate in value. The brand new motorcycle you bought becomes a used vehicle with real road miles on it. If you have financed your new bike then you may owe more than what the motorcycle is worth. When a buyer of a vehicle owes more than the actual cash value or worth of it is referred to as being upside down.
Getting into a situation where you owe more on a motorcycle than it is worth tends to especially happen when as a buyer you did not put any money down on your bike purchase. While this may have helped your pocketbook or personal finances by not putting money down, it could turn into an expensive learning experience if something goes wrong and the bike is damaged or it needs to be sold and your loan paid off.
How you end up owing more is a mixture of the depreciation of your motorcycle as it moves from being classified as new to used and the type of financing you have.The longer your loan term is the more likely you will be upside down. Besides the length of your financing there are the terms of your loan.
The interest rate of your loan is important as is the way in which your interest is calculated, especially during the first few years of the loan. The main ways that interest is calculated for vehicle loans are by simple interest or pre-computed interest.
Simple interest is the better of the two since with it the person paying on the loan accrues on the balance of the loan. If you get a loan for 48 months or more there is more of a liklihood of being upside down on your loan with simple interest. If the time period of your loan is for a shorter period of time you may not find yourself upside down, again more true if you did not put a down payment on the motorcycle. You can be upside down because the bike depreciates faster than the principal on the loan is paid, thus leaving the balance owed to the lien holder to be ore than the motorcycle is worth (can be sold for).
The second type of interest, pre-computed interest along with the rule of 78, is what one should stay away from if possible. With this type of loan agreement the interest is paid first while little or nothing is paid towards the principal for the first portion, normally 2 years (24 months), of the loan. If during this time period you want to sell or otherwise get rid of your motorcycle you will probably find that the bike is worth less than what you owe on it.
Do not get caught under the misconception that is you find yourself being upside down on the loan that you can just turn in the motorcycle. If this is done it will usually place a blemish on your credit report since it might be listed as the bike being repossessed. Then if they are able to resale the bike at auction or through a dealer, they are likely to get less than what you owe, if you are upside down, and you will then still be responsible for the difference between what the lender receives and the amount you owe on the bike. You then will be paying for a motorcycle that you no longer get to ride or have possession of.
There are precautions you can take to keep from being stuck upside with your motorcycle or vehicle loan. The first is to do your research on the type of loan you are getting from your financial institute. You want to avoid any loan that has the rule of 78, thus you pay off interest during the first portion of the loan and very little if any principal. Usually pre-computed interest loans include the rule of 78 so read carefully about the type of loan that you are being offered or that you are signing to get a loan for your bike.
Keep to a shorter loan time period. The longer the term of the loan the more likely you will owe more than the bike is worth for the first few years of the loan. This is especially true for loans that extend past 36 months.
Try to put a down payment on the bike. By putting money down on the motorcycle up front and then paying the remainder due on the bike with a loan it is not as likely that you will find yourself upside down. This is due to you owing less on the motorcycle and thus making it less likely that you owe more than the bike is worth.