How does saving over a thousand dollars off the cost of your next bike sound? I bet it sounds great. And, only a fool would turn down the chance to save that kind of money, right?
Here’s the secret: pay cash.
A Case Study and Some Cold Hard Facts
Little Sally Racer has her eye on a new Suzuki GSX-R750. It would make a beautiful addition to her garage and fulfill her ambitions on the track. The salesperson at the dealership will let the bike go out the door for $11,699 (which just happens to be MSRP for the sake of simplicity.)
Because Sally has a pristine credit score (and we all have pristine credit scores, suuurrree…), she’s secured a loan with the following generous terms:
Loan Amount: $11,699
Term: 48 months
Interest Rate: 5.5% per year fixed
These terms result in a monthly payment of $272.08. Reasonable, but that’s not the whole story.
Little Sally Racer will pay $53.62 in interest charges in the first month alone. Over the life of the loan, she’ll pay a total of $1360.72 in interest, bringing the price of that beautiful bike up to a whopping $13059.72. What’s worse, if Sally’s credit wasn’t already excellent, she’d be paying even more. I’ve seen interest rates as high as 24% and terms as long as 7 or 8 years!
Think for a moment on what you could do with an extra $1360.72 in your pocket.
I can hear some of you already: “But I’ve already financed my bike. And who has $12,000 in cash laying around anyway?”
What To Do If You’re Already Trapped in Financing Hell
The short, simple answer is to start paying down your loan faster by increasing your payment amount. Start out small, and you’ll find that even a little can go a long way:
| Payment | Extra | Total Interest Paid | Total Savings | Time Savings |
|---|---|---|---|---|
| $300 | $27.92 | $1219.16 | $141.56 | 4 months |
| $325 | $52.92 | $1115.85 | $244.87 | 8 months |
| $400 | $127.92 | $891.10 | $469.62 | 16 months |
| $544.16 | $272.08 | $645.78 | $714.94 | 25 months |
One way to ease the shock of paying extra is to increase your payment up to the next “round” number. For example, if your monthly payment is $272.08, a nice round amount would be $300. Once you get used to paying a little extra each month, you can start to increase the round number to $325, or maybe even $350.
And before you think that I’m writing on this subject because I’m perfect… I’m not. I too succumbed to temptation and took out a loan to buy my SV650, and the very plan I’m writing about is what I’m doing right now to pay off this albatross. There’s no better feeling in the world than to hold the title to your motorcycle in your hands!
Break the Cycle of Temptation
Paying interest is like taking cash money out of your wallet and setting it on fire. So why do we continue to buy motorcycles on credit?
- Instant gratification: that new bike smell is addictive!
- Lack of funds: no one has that much cash in the bank.
If you’ve got the discipline, you can break the cycle of temptation in three steps:
- Pay off your current loan.
- Open a new savings account, or subaccount, with your bank.
- Immediately start banking the money you would have paid toward your motorcycle payment into the savings account.
You can call this account your “next motorcycle fund”, because there’s always going to be a next motorcycle. This type of savings works well because your budget has already adjusted to paying the loan payment, so diverting the funds to a savings account after the loan has been paid off should be a cinch. (But if you’ve been digging under the couch cushions in order to make your motorcycle payment, I hate to say it, but you might want to reconsider the luxury of motorcycling.)
No one said taking control of your own financial destiny would be easy. You have to really want to hang on to that $1360.72 because there are plenty of folks out there willing to take it from you.
Learn More
- Dave Ramsey’s Debt Snowball Plan
- From Get Rich Slowly: Why I Drive a 13-Year-Old Car
- ING Direct has some of the best savings interest rates and makes it easy to open multiple subaccounts; create subaccounts for “emergencies”, “motorcycling”, “vacation”, etc.
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{ 9 comments… read them below or add one }
Being a numbers guy like I am, I can attest to your accuracy and your thoughts. It’s much cheaper in the long rum to save up and pay cash, but the instant gratification can be difficult to deal with when every bank and loan company in the world is fighting to loan you the money NOW.
I once read somewhere that for financial planning purposes, you should also never borrow money to purchase something that depreciates in value over time. A car or a motorcycle (in my case a scooter) would fall into this category. Thats’s hard to do sometimes, but it does pay off in the long run. Real estate generally doesn’t depreciate, so borrowing for a home is advised as long as you can keep up with the maintenance and upkeep.
Recently talked with someone that had some sort of Dodge Ram Pickup and said he was upside down by $11,000 on it. (Value less than loan amount) How much would that suck!
Good post!
Forgot to add:
When I bought my scooter I was able to get a 100% financing arrangement with no payments and no interest for 9 months. I paid it off completely almost exactly 8 2/3 months after purchase. Was hoping that pissed the bank off a little bit.
Yup! Great post, Stacy.
Getting rid of those credit cards and loans isn’t all that easy… I know… But with your method it can be done. I have been doing the ’rounding up’ method on my loans and now should have my pickup paid off nearly three months early. My little consumer loan should be done early as well.
Last year I had the opportunity to buy a little airplane. It was not that expensive and payments were around $275 per month for ten years (I think) with no money down. Interest? nearly 13%. I passed it up.
Pinching pennies in the long run does help. Think twice about that Starbucks or Red Bull or case of beer, new shiny plasma television, or bike farkle. Maybe think more about the ‘doing’ rather than the ‘buying.’
Great reply there, CPA.
@cpa3485: You bring up some good points. I’ve also heard the advice about loans for depreciating assets. (Can you tell I’ve got personal finance on the brain?)
Thanks for reminding me about zero percent financing. There’s definitely nothing wrong with taking advantage of these deals when they come along. The only catch is that you must make dead certain you’ll pay it off within the grace period. If you’re even one day over the deadline, you’ll be out a chunk of interest.
Another thing is low interest loans. I know that BMW had a 3.0% fixed rate loan program for a while on new motorcycles. If you scored a loan with such a low interest rate, you’d be much better off paying down other loans that have higher interest rates first.
@Ken: Great reply yourself, Ken! I’ve been slowly digging my way out of debt for a while now, with a temporary setback of buying a house during the peak of the bubble. Ouch! Oh well, at least we have a nice warm garage for the bikes!
Gotta pay off the bike first, then my student loans, and then the Big Kahuna (the house). Lots of work, but it feels good too. And it leaves more money each month for things that I really love, like riding and farkling the bike!
Last expensive bike I purchased was the FJR, which I got 6 months no interest (Yamaha) before rolling it over to 6 months no interest (Yamaha card), which I rolled over to 6 months no interest (New Visa card) which I paid off before it hit.
BTW, excluding “0% for X months” offers, good luck getting < 10% interest for a bike loan…
Great post. Financing does come with some perks that you didn’t mention. Although I had most of the cash for my ‘09 SV, I decided to finance the bike. Not because I wanted to throw money away but I wanted it on my credit report. A credit history of credit cards alone isn’t the best thing and I made sure I had the loan paid off in a couple months. The surprising thing is this…I have AMAZING credit which is coming in very handy now that I am looking for a house. When I got the finance rate back from Suzuki’s lender, they wanted to charge me 14.5% interest! Had I not had the cash to back up that purchase then I would have walked out but that was absolutely ridiculous.
One other suggestion for paying more on your loan, is to set up automatic payments through your bank (your bank sending the money – not the lender taking the money from the bank). Once you have done this, have $15 – 25 taken out each Friday (if you can afford it) and sent to your lender. Do this on top of your standard monthly payment. It lessens the blow of the larger lump sum each month, plus it reminds you to spend less when you go out each weekend
@Dean W: Clever! Are you one of those folks who keep rolling a balance on 0% cards around while allowing that borrowed money to accumulate interest in a savings account? I always thought that trick was pretty neat, but I suspect it might be more difficult to pull off these days.
@LifeOn2Whls: You must be young.
*ducks*
Yup, when used skillfully, a little credit goes a long way. Unfortunately, or fortunately I guess, I’ve already built up a good long credit history so the SV loan is simply burning money. At least it’s financed at 5.5%!
@Stacy: LOL.
I’m a hair away from the big 3 – 0. To some I’m still young but have a still have a long credit history. That said, I believe the finance rate I got has something to do with the dealer I went through and the bank they were using. My truck is financed, along with a previous car…so I’m no stranger. I did some research on the matter and I got the bike at a big discount. Since most can’t pay cash, this dealer seems to get a kick back on their finance deals with the bank. I remember seeing something about it on the papers I was signing but again, didn’t matter much since I was laying the cash down shortly thereafter.