Introduction To RV Financing

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2 Introduction To RV Financing The decisions you make about financing are every bit as important as getting a good price on your RV. Choosing the best financing options for your unique situation, can literally save you thousands of dollars, and I am going to show you how to get the best deal available. Just when you thought all of the decisions were finally over, you are now faced with a brand new set of decisions. Buyers often get so excited about purchasing an RV that they re not nearly as careful as they should be when it comes time to make the financial decisions. Getting good financing on a recreational vehicle takes some knowledge and a little bit of work, but it is well worth it in the long run since you can put dollars back into your pocket. Now That You re Offer Has Been Accepted What s Next? As mentioned in the RV Insider s Handbook, the financing department is one of the biggest money-makers at the RV dealership. The industry insiders often referred to it as: working the back end of the deal. It is not unusual for the finance and insurance departments at a dealership to produce more profit on the back end than the sales staff does up front during price negotiations. Even if you have decided to pay cash for your RV, or if you already have a loan in place, you still must go to the finance department to get the legal paperwork done. The finance department will figure out the total price on your new RV including taxes, registration, plates, etc. At this point, they will ask you how you want to pay for the RV. An astute RV buyer like you, will already be prepared for this question. You will sail through the process, and you won t succumb to the pressures from the dealership s finance manager, who is really just another salesperson trying to get you to buy their services. If you elect to go blindly with the NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 2

3 dealer s financing offers, you could (and most likely will) spend unnecessarily. Just remember, you can always negotiate the interest rate. Should You Finance Your RV or Pay Cash? There are certainly advantages and disadvantages to financing your RV, as well as paying cash for it. Even if you can afford to pay cash for your RV, it might not be in your best interest. Let s take a look at the pros and cons of each option. Paying Cash: Wouldn t it be nice to pay cash for your RV and not have to make monthly payments? It sounds great, but unless you are very wealthy, have just won the lottery, or can t qualify for financing, you might actually be borrowing from yourself to pay for your RV, and that is not always the wisest thing to do. Carefully research your resources and how much it will cost to utilize these resources in order to determine if it will really pay for you to borrow from yourself. You might finance your purchase by an equity line of credit, proceeds from the sale of a residence, or other windfall income to make your purchase with cash, but will it really save you money by borrowing from yourself? The money you use to pay for your RV could be invested and product income for you. Also, if you borrow from an IRA or retirement account, or cash in a Certificate of Deposit (CD), you might incur taxable capital gains or early redemption penalties. Do your homework BEFORE you cash in any of your savings. The interest on these types of accounts could very well be lower than the very best RV loans available to you, in which case it would be cost effective to NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 3

4 borrow from yourself. But you might also be able to land a financing deal that has lower interest rates than you are now receiving, in which case it pays to finance. Paying Cash: This is a good time to consider financing your purchase because interest rates are low. This makes for low monthly payments and less total cost. If you finance for longer periods of time, your monthly payments will be even less, which could allow you to buy a larger RV than you might have been able to purchase otherwise. The RV Industry Association (RVIA) conducted a financing survey and queried nearly 300 banks and other financial institutions. They found a willingness among all respondents to finance recreational vehicles. According to the RVIA study, one factor that makes it easier to purchase an RV today is that RVers as a whole are reliable buyers. Since most RV purchasers are home owners, just 1.09% of all RV loans are delinquent. As a result, lenders are extending RV loan terms and making monthly payments more affordable. Financing an RV purchase might be smarted than breaking into your savings or cashing in assets. It could offer greater economic flexibility, allowing you to invest your money and possibly obtain dividends greater than the cost of financing. As interest rates rise, you will have your loan locked in at a low rate, freeing your cash to invest at the higher rates, which will save you money. Another advantage of financing is that you can deduct the interest on your income taxes. Tax Advantages of Financing Your RV Taking a tax deduction on the interest payments for your RV loan is a huge advantage. Because most RVs qualify as a second home for IRS NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 4

5 purposes, all of the interest can be written off as second home mortgage interest. To qualify, your RV must meet the criteria to be defined as a second home. Virtually all types of RVs, including motorhomes, van campers, travel trailers, truck campers, and even some folding camping trailers meet this criteria which is: The RV must be equipped for sleeping, living, bathing, food preparation, and dining activities. In addition, the RV must meet the following criteria as well: The RV must be used as security for the loan. The interest expense deductions on the RV must exceed the taxpayer s standard deduction. (In other words, you must itemize your deductions.) If you rent out your RV, you can only rent it out for a total of less than 15 days per calendar year. There are two booklets published by the IRS that contain helpful information about IRS deductions for your RV loan interest: Publication 936 Home Interest Deduction Publication 523 Selling Your Home You can get copies of these publications by calling the IRS at (800) or download them from the IRS website at: What s the Best Source of Financing? Should you finance with the dealer or through your own bank? Should you use your own home equity line of credit or borrow from your credit union? NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 5

6 My advice is to get a loan from whoever provides the best rates and terms, regardless of whether it is the dealer, your own bank, or even your rich uncle! There is only one way to find out which is the best, and that is to do some further research into your options. While this process does take a little time, the last thing you want to do is be in a position where you are at the RV dealership and you are too lazy to do the research, or you feel obligated to take their financing, so you accept their terms, no matter what they offer. Locating A Lender RV loans are available through RV dealerships, banks, savings and loan companies, finance companies, credit unions, and even through Internet Banks online. My advice is to contact as many places as you can to get quotes. It might seem like a daunting task, but the rewards will be well worth your time. A good place to start your research is the Recreational Vehicle Industry Association (RVIA) website which provides a list of companies that offer financing specifically for RV purchases: NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 6

7 Below, I will cover some of the most common lenders, including the RV dealership, the bank, credit unions, and the Internet, as well as the advantages and disadvantages of each. Dealer Assisted Financing: Most dealerships offer in-house financing. They do not actually provide the financing themselves, but they farm it out through a variety of places including banks, financial lending institutions, or the RV manufacturer of the unit you are considering purchasing. You should ask which lenders the dealer represents. The financial department of the dealership is experienced at getting loans for customers with a variety of credit scores and profiles. Using a special computer program, they will shop your loan with a number of different lenders and come up with the best package they can find for you. The advantage of using the dealership financing is that it is quick and easy, and you can arrange it at the same time you purchase your RV. If saving money is not important to you, and you don t care about how many hard credit inquiries go on your credit history, this is a good way to go. The dealer will most likely add some form of commission to the loan he offers you. In other words, if he finds a loan at 5%, he might raise it to 5.5% and tack on additional financing charges on top of that. Even if he offers a competitive rate, be sure you look closely at these additional fees. Bank Financing: As you learned in the RV Insider s Handbook, RV loans are considered a good risk by banks because they suffer fewer defaults and charge-offs than other types of loans; therefore, they are more likely to offer you competitive rates and terms. Contact the loan department at the bank where you do your regular banking, through the bank that issues your credit card, or at a bank or financial institution where you ve had a loan before. These banks will know NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 7

8 your credit history and will be eager to get your repeat business. Often you can even shop by phone. Credit Unions: If your company or union shop offers a credit union, it s a great idea to take advantage of its services. Credit unions work much like a bank, and they offer a variety of services, including low interest loans. Your credit union is an excellent place to shop for a loan. They are local, and they have a prior relationship with you. A credit union knows that their customers typically have better job security (which translates to a lower risk of loan default) than people in the private sector. Therefore, they are more likely to give you a competitive loan rate than some of the other sources. Internet Loan Companies: There are literally thousands of lending institutions online that offer RV loans. These are called remote lenders, meaning that they never meet you face to face, but transact loans by , fax, and regular mail. The Internet is an invaluable tool in researching your loan. Some websites actually submit your loan application to many vehicle lenders and come back with the best available rate within just a few minutes right at your computer. It can take some work, but it will pay off in the lower interest rate you get for the RV loan. The biggest advantage, besides being able to shop hundreds of lenders at the push of a button, is that you never have to leave home or make a phone call. However, you have to be aware of fly-by-night companies and less than scrupulous loan schemes. Be sure to check out any Internet company fully before you decide to take out a loan from them. NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 8

9 Financing With Credit Cards: Another source of funding which is almost always overlooked, is purchasing your RV on a credit card. It is quick and easy, and like the Internet loan, you don t have to make tedious phone calls or even go to the bank. As a matter of fact, if you put your RV purchase on your credit card, you don t even have to go through the process of applying for the loan since you already have the credit card you ll be using. Often times, purchasing an RV on a credit card allows you to earn cash back, rewards points, or other promotions depending on your credit card. You might even use a credit card that offers no interest or very low interest for a certain period of time which will save you money. If you purchase an RV with a credit card, make sure you are familiar with all of the terms of use like: What will the interest rate be after the initial period? Are there any early payment or early payoff fees? If you do end up financing your RV on a credit card, make sure you pay more than the minimum every month or you could end up making payments on your RV for twenty years or more. The positive thing about this option is that because your loan is not secured by your RV, if for some reason you cannot make payments, the RV cannot be repossessed as it would be with an RV loan. Other Sources For Loans: Many clubs like automobile, Costco, and others offer RV financing for their members. They often are able to offer low-interest loans for their members because they run so much business through the finance companies they partner with. NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 9

10 The Loan Process When you approach a lender, be it a bank, dealership, or over the internet, the first thing you will need to do is fill out a credit application. With the aid of technology, within minutes your credit worthiness is determined by the information you provide. After you fill out the information and provide them with your down payment amount, you will receive a quote that includes monthly payment amounts, interest rates, and terms. Much like the purchase process for your RV, you can also negotiate the rates and terms of your loan. If you agree to a rate higher than you could find elsewhere, you could be giving back everything you saved and more on the front side of the deal, not to mention the time spent carefully planning your purchase. I will explain this process to you in detail and show you how to avoid this pitfall. How Much Can I Borrow? Your credit rating and the RVs selling price determine how much money you can borrow. The average term for an RV is but often you can get loans for longer. Of course, this varies dramatically depending upon the make and model of your RV and the price that you pay for the RV. The average down payment ranges from 10%-20% of the purchase price. The Down Payment Down payments can vary from as low as 0% down to as high as 30%-40% of the purchase price. The amount you decide to put down on the loan can be dictated by your credit-worthiness or by other factors and indicators determined by your personal financial situation. NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 10

11 You might decide that you want to make a big down payment to reduce your monthly payments or your total loan amount. Or, you might decide to put as little as possible down to keep your cash. If you are financing your RV through a bank, savings and loan, or finance company, credit union, or RV dealer; lenders typically require a 10% down payment on loans up to $100,000 and a 15% down payment for loans over $100,000. Many times, if you put up a big down payment, the lending institution will offer you a lower interest rate because their liability is less. On the other hand, if you put the purchase on a credit card, you don t have to come up with any cash up front. Interest Explained: The rate on an individual s RV loan is determined by the finance amount, the length of the loan, and the person s overall credit score. For that reason, the interest rates and terms for every loan are different. The better your credit score, the better interest rate you will receive. Most RV loans are calculated using the simple interest rate method. With a simple interest loan, interest is calculated on the loan s unpaid principle balance, the loan s interest rate, and the number of days since the last payment. The rest of the payment goes to principal. It is critical to shop around for the lowest interest rate possible. A mere 1% difference on a $60,000, ten year RV loan will cost you over $6,000 dollars wasted in interest payments. Beware: The Lowest Interest Rate Is Not Always the Best Deal! When shopping for a loan, be sure to look at all the variables. Loans that have the same interest rate can vary dramatically based upon how the interest is determined. NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 11

12 Interest can be figured by simple interest, add-on, or variable rates. The only thing that matters really is the total cost to you for the loan. That is the total interest you will pay over the life of the loan, including points and finance charges. To find out what you area really paying in interest, convert all competing loan offers to their annualized percentage rate (APR) so that you can compare them accurately. The difference of a quarter-of-apercent can mean several thousand dollars more in total costs over the term of the loan, so having knowledge is powerful! How To Find The Best Interest Rate: How do you find the loan with the lowest APR? You take the time and do the research to educate you and learn what rates are available. That means shopping for a loan at all the places previously mentioned. Then you should check what is available online. Because interest rates on loans are closely tied to auto loan rates, you can easily search and find what the going rates are for auto loans. lists national averages for new car loans, as well as rates available in local markets around the country. By comparing the rates you are quoted with the national average for car loans, you can tell if you are getting a good deal. Also, armed with this information, you can take it to a lending institution and negotiate a better deal, just like you negotiated for the price of your RV. What Type Of Terms Are Available? The length of the loan makes a difference, both in your monthly payment and in the total cost of the loan if you keep it for the entire term. What are the best terms for you depends upon your personal situation and preferences. According to the RVIA financial survey, the average term for a new RV is years, but it can be longer, especially on larger models. If you NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 12

13 finance $50,000-$100,000 or more, many lenders will let you extend the loan term to 20 years. The term for pre-owned RVs is generally much shorter and usually ranges from 4-8 years. Which Is Better: Long or Short Term Loans? There are many things to take into consideration when deciding how long to finance your RV. If having a low payment is important to you, then making a loan for the longest term available would be your best option. However, the shorter the loan period, the less you will pay in overall cost for your RV. If you are planning to sell your RV in a year or two, you might opt for a short term loan. One of the biggest pitfalls you want to avoid is having a negative balance when you go to sell your RV. The industry term for this is being upside down. With a short term loan, and/or a larger down payment, you pay down your principle and interest at an accelerated rate, which means you won t encounter this perilous situation. The 3 Steps to Getting the Best Financing Deal Possible There are three steps to getting the very best financing deal possible, and if you follow these steps, you will save yourself hundreds, and more likely thousands of dollars. 1. Do your research. It sounds like common sense, and yet most people never do any real research! By research I mean getting quotes from as many different places as you can. The more information you have, the better position you will be in to negotiate the best deal. Because auto financing is closely tied to RV financing, look up the current auto interest rates at NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 13

14 2. Carefully compare each loan. The loan with the lowest interest rate might not end up being the cheapest after loan charges, pre-payment penalties, and other sneaky fees and charges. Also look at how the loan interest is calculated, which makes a difference in the total amount of interest you pay. Converting loan interest to APR will give you a much clearer basis from which to compare. Buyer Beware: 3. Take your best two or three loan proposals with you when you go to the dealer. Show them the financing you have in place, and ask them to beat it. Quite often, they will beat it just to get your business. If they don t, contact the other lenders to see if they will. Remember, just a small drop in interest means big savings to you. Although most lending institutions are legitimate, some lenders will lure you in with low interest rates and then charge for other items that most people are not aware of in order to make up the difference. Even with a solid lender, there can often be hidden fees. One trick that lenders use is to load up your contract with fees and processing charges. Others advertise low rates, and then they raise them dramatically when your loan application is processed. Some lenders might require backup collateral. If a lending institution requires that you use your home as a backup asset for your RV loan run (don t walk!) away no matter how good the deal looks. These companies will lend you much more money than you may be able to afford to pay back. If you can t make the payment, they go after your house! NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 14

15 Also be wary of balloon payments. They can seem attractive because your loan payments are cheap for the term of the loan. But at the end of that term, a large balloon payment of the remaining balance of the loan falls due. The Top 3 Mistakes When It Comes to RV Financing That Could Cost You Thousands of Dollars Any one of these common mistakes could cost you lots of money unnecessarily. However, the savvy buyer can avoid all of these mistakes. Mistake #1: You Didn t Do Your Homework If you take the first loan that is offered, chances are you won t get the best deal, and you certainly won t be in any position to negotiate. It takes time and effort to research the best deal. You often will spend hours filling out credit application, but you will be rewarded by the knowledge that you got the best deal possible. Plus, you will save money on interest as well. Mistake #1: You Didn t Negotiate The interest and terms of your RV loan are negotiable, just like the sales price. Most people never attempt to negotiate because they are not aware of this, or because they don t like to haggle. While it might be a little uncomfortable to bring up getting a deal with the credit manager, if you make the effort, you will most likely receive the pleasant reward of a lower rate. Mistake #3: You Didn t Read the Fine Print on the Contract Lenders like to put fees, fines, and conditions in the fine print, hoping that you will not discover them, at least not until it is too late. Many buyers are surprised to learn that the interest rate will go up after a year, or that there is a penalty for paying off the loan ahead of schedule. NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 15

16 The savvy buyer knows that the time to read the fine print pays off and will avoid paying more than necessary BEFORE they sign on the dotted line. A Tip For Full Timers Most RV lenders offer automatic bill pay. With automatic bill pay, your loan payment is deducted automatically from your bank account on a certain day each month. This is a good option if you are on the road for long periods of time because it is convenient and you won t incur late charges when you are away from home. The Bottom Line For Financing an RV If you want to save even more money on your RV purchase, approach financing like you would selecting and buying your RV. Look at your financial situation, research different options that are available to you, and choose the financing method that is best for you. Remember, EVERYTHING is negotiable, so don t think you have to take the first offer thrown at you. Use your research and what you learned in this RV Finance Blueprint to negotiate the best deal you can get. Shop around at various banks and online. Ask for what you want. If you don t like what the dealer offers you, ask for a better rate. As you narrow down your financing options, remember to ALWAYS read the fine print and make sure you understand every details of the financing proposal. A bad financing decision could offset all of the savings you gained when you negotiated the RV purchase price. Whether you decide to finance through the dealer, to get a loan from your local bank, or to pay cash the most important thing is that you structure your financing so it fits your budget and your needs. That way, you can fly down the highway in your new RV, free from the worry and confident that you negotiated the best possible deal! NRVOA RV Insider s Blueprint: Secrets of RV Finance Page 16