What you should know about RV financing?
You found the perfect RV at a dealership, and it’s time to talk about finance rates and terms.
Your Bank or the Dealer’s Bank?
If you decided to move forward with the deal it’s time to talk about financing, unless you are going to pay cash. You really need to understand what your finance options are, because any money saved during the negotiating process can be lost during the finance process.
One of the first considerations is whether to use your bank or one of the dealer’s banks to finance the RV. Most conventional lenders are not set up to finance long term RV loans. Your bank might be willing to finance the RV but on a shorter term, which results in a much higher monthly payment for you. One of the nice things about an RV is that RV specialty lending banks offer extended terms and competitive rates, so you have a lower monthly payment.
The term of the loan is based on the dollar amount financed, and some high dollar loans can be financed for up to 240 months. It’s not uncommon for an average priced travel trailer to be financed for 120 months. This can help get the payment within your budget, and free up some money so you to use your new RV more often. If you are looking for a payment to fit your budget a longer-term loan can help; but keep in mind what I said about paying back the interest to the bank before you pay on the principal. Check with your bank and the RV dealer’s banks to see who can offer the best term to fit your needs.
Finance Terms & Interest Rates
Let’s talk a bit more about finance terms. One advantage to a longer-term loan is a lower monthly payment. The average RV buyer will trade RVs every few years. If this is the case, wouldn’t it make more sense to save a couple hundred dollars every month on your payment if you are not going to pay the full amount of interest anyway? This goes back to how good of a job you did negotiating the price of the RV. If you saved a significant amount of money when you bought the RV you are in better shape when it’s time to trade. It’s also common for RV owners to pay off an existing loan or to refinance the loan before it reaches the full term.
Note: Most RV loans are simple interest, fixed rate loans, and there is no penalty for paying the loan off early.
If you do plan to keep your RV for a long period of time and you are in a position to make higher monthly payments you can finance it on a shorter term to avoid the long-term interest payments.
Now let’s talk briefly about interest rates. Interest rates affect what your monthly payment is and the total amount of money you will pay for the RV if you keep it for the life of the loan. Keep in mind, buying an RV is considered a luxury item and you must have good credit to secure a loan, especially from the RV specialty lending banks. A bank will consider an applicant with an average credit history, but if you are approved it will be at a higher interest rate because the bank is taking a higher risk. The good news is, a good credit rating equates to good interest rates.
I said a moment ago any money you saved during the negotiating process could be lost during the finance process. It is quite possible for the finance manager to make more money on the financing than the dealership made on the sale of the RV. RV lending banks offer RV dealerships competitive interest rates in an attempt to get the RV dealer’s loan business. The finance office will then offer you an interest rate in an attempt to get your business. If they get a higher interest rate from you than the bank offered them, they get paid what is called participation. Interest rates are something you must compare before you sign a bank contract. Get a quote from one of the RV dealer’s banks, one from your bank and one from an Internet lending source that finances RVs. Find out what the current interest rates are and if you have above average credit don’t settle for higher rates. It really pays to do your homework on interest rates prior to making the deal.
Note: You can be pre-approved for a certain dollar amount before you go shopping for your RV and then compare the rates you were given, with what the RV dealership can offer. You can check with some reputable RV Internet lending sources too.
Trade-in or Sell Outright
If you already have an RV and you are planning to get another one you need to decide if you are better off trading your current RV, or trying to sell it outright. There is no easy answer what is best for you, but there are a couple of things to consider. If your RV is worth what you still owe, or if it’s already paid off you are better off trying to sell it outright. An RV dealer cannot afford to put more than wholesale into a used RV, and in most cases it will be less than wholesale.
Try to remember when we talked about the MSRP being inflated in case a customer has a trade-in. Let’s say your current RV is paid for. Now just for an example let’s say that you want to buy an RV that has an MSRP of $20,000, but the dealer could actually sell it outright for $17,000 and make a reasonable profit.
Now say your trade-in has a NADA retail value of $10,000 and a wholesale value of $7,000. Are you with me so far? The most a dealer will ever give you is the wholesale value. So, they take the difference between the MSRP of the new RV and what they can actually sell it for, which is $3,000 and add it to the $7,000 wholesale price they actually put into your trade. You are under the impression they are giving you 10,000 for your trade and you are paying $20,000 for the RV. They take the $20,000 minus the $10,000 for your trade and you finance $10,000 for your new RV.
Now let’s say you were able to sell your RV outright for $9,000. You go back to the dealership and negotiate the best deal on the same $20,000 RV, and they are willing to sell it for $17,000. You pay $9,000 down and you only have to finance $8,000 for the same RV. You save $2,000.
The problem is most people owe more money on their RV than it is actually worth. If you still owe more on your RV than it is worth it might be difficult to sell it outright. In this situation ask for figures on a trade-in. The dealer might be able to roll what you still owe into the new RV loan. Let’s take a look using the same figures, but instead of your trade being paid for, let’s say you still owe $12,000, the retail value of your RV is $10, 000 and the wholesale value is $7,000. The new RV has a retail price of $20,000 but the dealer could actually sell it for $17,000 and make a reasonable profit. The dealer takes the difference between the retail price of the new RV and what they can actually sell it for, which is $3,000 and adds it to the $7,000 wholesale price they give you for your trade. Now they take the $20,000 for the new RV minus the $10,000 for the trade leaving a balance of $10,000.
Next, they take the $12,000 you still owe on your current RV and add it back in for a balance of $22,000 for the new RV. You put 15% down ($3,300) and finance $18,700 for the new RV. These are very basic figures just to give you an idea of what is best for you based on your current situation.
If you decide selling your RV is the best route for you, but you don’t know how or where to begin, talk to an RV dealer about putting it on consignment. Selling on consignment simply means the RV dealer will show and sell your unit for a pre-determined charge or fee. You will be responsible for keeping insurance on the unit while it is on the dealer’s lot, and you are responsible for paying the balance still owed to any financial institution when it is sold. Read the consignment contract carefully before you agree to the terms. Determine how much you need to get out of the RV and work all of the details out with the RV dealer. Another option you have is to sell the RV outright. You can advertise through different types of media and handle the sales transaction yourself.
RV Financing FAQ
Will one RV lender offer better interest rates than another RV lender?
Interest rates change frequently. If the prime rate goes up RV finance rates will go up too. RV lenders send updated rate sheets to RV dealers whenever their rates change. RV specialty lenders watch each other closely and if one lender lowers interest rates the other lenders generally follow suit. They usually stay within a quarter to a half point of each other.
Are there other factors that determine what interest rate I get?
Yes, there are several factors that will determine the rate you get.
- It depends if the RV is new or used. A used RV (normally over 3 or 4 years old) has a higher interest rate than a new RV.
- Your down payment affects your interest rate. If you finance the RV on a zero-down program the interest rate will be higher.
- The term of the loan affects the interest rate. The shorter the term the higher the rate, the longer the term the lower the rate.
- The amount financed affects the interest rate. The lower the dollar amount the higher the rate, the higher the dollar amount the lower the rate.
- Your credit history (credit rating or score) will affect the rate. The better your credit score the lower the interest rate.
- Carefully read the section on finance terms and interest rates in this chapter.
Should I shop around for a better rate, or will the rate they offer be the best rate I can get?
You should be aware of what the current rates are for RV loans and based on the criteria listed, determine if you are getting the best possible rate you can get. If you think you qualify for a lower rate, by all means try securing a better rate elsewhere. There are several RV specialty lenders on the internet that would like your business and will offer competitive rates.
Do not however let too many lenders run a credit check on you in an attempt to get a lower rate. This can backfire, so be selective about who is running credit checks. If lenders make several inquiries on your credit history your credit score can be lowered causing you to get a higher interest rate. The reason for this is, when banks see numerous inquiries they are under the impression you are having trouble securing a loan and could be a credit risk to the bank. While we’re on this subject, when the RV dealer is going to run a credit check tell them to only submit your application to one lender. Some unscrupulous finance personnel think it’s easier to submit your credit application to all of the banks at one time, leaving you with numerous credit inquires.
Can you explain more about financing an RV with no money down?
There are usually a couple of lenders that offer no money down finance programs. These programs have certain guidelines to qualify. The type of RV, dollar amount, term of the loan and your credit rating can all factor into these types of programs. The finance rate will usually be higher too.
What length of term can I expect to get on an RV loan?
The term of the loan is based on the dollar amount financed and the age of the RV. Some RV lenders offer 20-year loans on financed amounts over $100,000. Loans ranging from $25,000 to $99,000 can qualify for 15-year loans, and loan amounts between $10,000 and $25,000 may qualify for 10 to 12 years repayment terms.
Why would anybody want to pay the interest on a 15 or 20-year loan?
The biggest advantage of a long-term loan is you get a lower monthly payment. Financing $100,000 for 240 months at 7% interest would be $775 a month. The same loan for 120 months would be $1,161 a month. You save almost $400.00 a month. But keep in mind you will have little or no equity if you try to trade the RV in within the first few years.
There are several things you need to consider when you determine what the best term would be for you.
- How much can you afford to pay every month? The term of the loan directly affects the monthly payment.
- How long do you plan to keep the RV? If you only plan to keep it for 3 or 4 years you won’t be paying all of the interest anyway. The downside to this is you won’t have any equity built-up in it either.
- If you plan to refinance the loan, or pay the loan off before the full term, a longer-term loan would probably make more sense.
- If you plan to keep the RV for the life of the loan a shorter-term loan might be better for you. Make sure you can handle the higher monthly payments and the more you can put down initially the better.
Can I finance an RV with below average credit?
RVs are for the most part considered a luxury item, so the criteria to finance an RV are more stringent than it is to finance an automobile. There are lenders who will finance below average credit but interest rates will be higher.
How is the interest on an RV loan calculated?
The majority of RV loans from RV specialty lenders are simple interest fixed rate loans. What this means is you only pay interest on the principle owed, and in most cases there is no penalty for paying the loan off early. If you choose to pay more than your required monthly payment you can shorten the term of the loan and save on interest.
Will I need a down payment and if so how much?
Down payments vary slightly between RV lenders but 10 to 20% down, in the form of cash or a trade-in is usually the range. There are programs that offer low down, or no down payment but this will usually increase the interest rate. Most banks want to see your good faith commitment to the loan.
Do I need insurance on the RV to get a loan?
Yes, insurance is required when you close on the loan. The bank will not loan the money until they have proof of insurance. See Chapter 5 on RV insurance.
Should I finance the RV or pay cash?
It is my personal opinion that it makes more sense to finance your RV purchase. If you finance the RV you can maintain your personal financial status without liquidating any assets. You can also take advantage of writing off the interest on your income taxes if the RV qualifies.
If I said it once I said it a hundred times, RV’s are a major investment like your house or automobile, so make sure you do all of your research to make sure you know all the ins and outs when purchasing your dream travel trailer or motorhome.
This is an excerpt taken from my best-selling book, The RV Book
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