Choosing a Loan Term When More is Less

Many people who contemplate financing an RV, or any other high-ticket item such as a boat or private aircraft, are intimidated by the length of the financing term needed for an acceptable payment. Typical financing terms are 10 to 20 years, with 15 years being the most common.

Some consumers choose a shorter financing term and a higher payment simply because of their fear of the longer-term commitment. Even though they obviously know RV owners rarely, if ever, keep an RV for the entire term of their financing; they choose a shorter loan term. They unnecessarily strap themselves to a higher payment that could strain their budget - should illness, unemployment or other hard times take place.

Most buyers choose the longest term available to secure the lowest payment possible - even though they could afford much more. They pay more interest than principal during most, if not all of their acutal loan period, and wind up in an upside-down position.

In other words, the remaining payoff on their loan is much more than the actual value of their unit when the time comes to trade or sell their RV.

A Hybrid System

Savvy RV buyers use a Hybrid type of financing system to get the best of both worlds. They finance the RV for the longest term available for the loan amount, which makes the payment lower than they can actually afford.

During the loan, they make the monthly payment PLUS an additional amount, which is directly subtracted from the principal amount of the loan.

When this approach is followed with discipline, it can lower the effective interest rate to as much as half the original rate - as well as dramatically shortening the length of the loan term.

It also allows the most flexibility. Should the borrower face a situation where times are rough or money is tight, they still have the luxury of making the lowest payment possible.

An Example of a $50,000 Loan

Interest Rate - 6.25%
Term in Years - 15 years
Payment Amount - $428.71
Total Interest Paid - $27.167.80

If this person added $50 to each monthly payment, he would change the repayment terms to:

Effective Interest - 5.64%
Loan Term in Years - 12 years
Total Interest Paid - $18,927.20
TTL Interest Savings - $8,240.60

Now lets assume that this person added $150 to the monthly payment.

Effective Interest - 2.66%
Loan Term in Years - 8 years
Total Interest Paid - $5,556.17
TTL Interest Savings - $21,611.63

Whats the Bottom Line?

Comparing our last example of a consumer applying a hybrid system to an individual who took out an 8-year loan upon purchasing the same RV The hybrid system would have saved nearly 4% in interest over an actual 8-year loan term.

By shortening your loan term from 15 years to roughly 8 years, he would have saved over $21,000 in interest. He has also reduced the effective interest rate to less than 3%.

Plus, the buyer has paid off a 15-year loan in about 8 years! Even if he misses a few months of additional principal payments, he will still have saved thousands of dollars in finance charges.

The additional $150 per month added to principal has saved about $78 per month over choosing an 8-year initial loan term. That equates to about $7,500 savings in payment amount over the course of the loan.

What if I Dont Make the Additional Payment?

The key to making a hybrid payment system work - is discipline. You must make the additional principal payment every month, or very close to it. You should be certain your scheduled payment amount plus any additional amount you plan to add toward principal is within your budget.

Even if you intend to use a hybrid payment system, but never add an additional penny towards principal you will have simply paid off your loan in the same manner the majority of RV buyers choose.