How a Motorcycle Loan Works
Typically, when you take out a motorcycle loan, the collateral is the motorcycle itself. That means the lender retains the title to the motorcycle. If you don’t make the payments or fail to comply with the other terms of the loan (such as maintaining insurance on the bike), the lender has the right to repossess it.
With traditional motorcycle loans, the lender will pay the motorcycle dealer directly, minus your down payment.
If you don’t want to use the bike as collateral, you can offer something else, such as another vehicle, or a lien on your home.
If you have good credit, you may even be competitive for an unsecured personal loan. However, this is riskier for the lender. You may have to pay a higher interest rate for an unsecured personal loan.
Your credit score
Nearly all motorcycle loans will require a credit check. Different lenders look at different credit score products. A few of the most common in the motorcycle/automotive industry include:
- FICO Auto Score – Scores range from 250 (very bad) to 900 (excellent).
- Pinnacle (formerly Beacon) – Scores range from 300 up to 850.
- VantageScore – Scores range from 300 up to 850.
No matter what score they use to assess your application, a higher score is likely to allow you more choices, better terms, and a lower interest rate.
There’s no set minimum score. But to be competitive for the better financing deals, you should try to get your credit score up to about 650 or better.
Just so you know where you stand: The average FICO score as of 2020 is 710.
How to Get the Best Motorcycle Loan
Improve your credit score
The better your score, the better the loan you’ll be able to qualify for. Borrowers with good credit qualify for lower interest rates, lower payments, and better terms.
Here are some ways you can maximize your credit score so you can get the best loan possible:
- Check your credit report. It’s a good idea to check your credit report for errors or any delinquencies or defaults before you apply for a motorcycle loan. You can get a free credit report from each of the three major consumer credit bureaus up to once per year via www.annualcreditreport.com.
- Bring all accounts current. You don’t want to have your heart set on a bike, put in your loan application, and then have the dealer’s finance manager pull your credit report and show you a bunch of delinquencies and defaults you didn’t even know existed.
- Pay down debts. The company that calculates your credit score for most lenders is the Fair, Isaac Corporation. One of the key metrics they look at is your credit utilization ratio. This measures how much of your total credit available you are using. If you have four credit card and consumer accounts with total combined credit limits of $15,000, and your current balances total $10,000, your credit utilization ratio is 66.67%. Pay off $5,000, and your credit utilization ratio falls to 33.33%.
A higher credit utilization ratio suggests you may be under some financial strain, and therefore a higher credit risk. Every little bit helps, but those with strong credit scores generally have credit utilization ratios below about 30%. Those with excellent credit scores are usually below 10%.
- Make payments on time. According to the Fair, Isaac Corporation, your history of timely payments is the number one factor they use in calculating your credit score, with a 35% weighting.
In many cases, merely bringing delinquent accounts current, and challenging any credit report errors can significantly increase your credit score in just a month or two.
Reduce your debt-to-income ratio
Your credit score isn’t the only thing motorcycle lenders consider. They also look carefully at your current payment obligations, and how big a chunk of your income is going to them. The most important metric they use is your debt-to-income ratio, or DTI. Motorcycle lenders will compare your monthly income against all your regular debt, rent, and mortgage payments, including:
- Student loan payments
- Minimum monthly credit card payments
- Rent or lease payments
- Mortgage payments
- Existing car payments
- Medical debt payments
- Your projected motorcycle loan payment, if approved
- Other monthly payments listed on your credit report.
Example: If you have a current income of $5,000 per month, but your existing debt payments eat up $2,500 every month, you have a debt-to-income ratio of 50 percent. But if all your existing monthly obligations only added up to $1,000, you would have a DTI of only 20%, which is excellent.
What’s a Good DTI Ratio for a Motorcycle Loan?
Ideally, lenders want to see a debt-to-income ratio of 36% or lower. Anything over 50% may make it very difficult to qualify for a loan with decent rates or terms.
The two fastest ways to improve your debt-to-income score are to increase your income and to pay off debts. When you pay off an existing loan entirely, you eliminate the entire payment. This has an immediate effect on your debt-to-income ratio, which should show up in your credit score very quickly. For the best loan programs and terms, try to get your debt-to-income ratio below 36%.
Other Factors: The Bike
In addition to your personal credit history and capacity to make your loan obligations, lenders also look at the following:
- Is the bike new or used?
- If used, how old is it? How many miles are on it? Is it still under warranty?
- Has the bike been in a flood or accident?
- What is the value of the motorcycle?
Typically, lenders will not provide 100% financing on older motorcycles. The older the bike, the less they will want to finance. Lenders may set an LTV (loan-to-value) cap of 80%, 70% or 60% on used motorcycles. You have to come up with the difference in the form of a down payment or trade-in.
New motorcycles, however, may qualify for 100% financing and even more. Some lenders may finance up to 120% of the bike’s value.
Lenders typically have a minimum and maximum loan amount they’ll issue. Maximum rates depend on the lender, but some companies will finance up to $100,000 and more to qualified buyers with strong credit.
What to Expect at the Finance Manager’s Desk
When you go to a motorcycle dealer, they aren’t just trying to sell you a bike. They are also trying to sell you a loan. On top of that, they are also trying to sell you additional products like warranties, accessories, roadside service, theft protection, ‘gap’ insurance, pre-paid maintenance plans, life insurance, and more. You may also have dealer fees, freight fees, set-up fees, document fees, and of course, tax, tag, title, and license fees.
For street bikes, there’s not much you can do about tax, tag, title, and license (TTTL). But everything else is a sales process.
They will then try to sell you these additional products bundled into the loan. Your dealer will typically receive a commission for the higher interest rate, along with commissions for each warranty, maintenance plan, or other product sold.
Some of these products may be a great deal. Others may not be a good fit for your particular situation and budget. Just understand that the dealer has an interest in getting you to agree to these additional products – each of which will add a few dollars per month to your payment.
Understand also that most lenders allow their dealer partners to ‘plus-up’ the interest rate to create additional profit for them. For example, the lender may be willing to lend money at 7%. But they allow the dealer finance manager to tack on two more points, for a total rate of 9%.
The practice of plusing-up the interest rate at the dealer’s business desk underscores the value of shopping around for your own loan before going to the dealership. If the dealer’s lender is secretly willing to lend you money at 7%, chances are good someone else will, too. Having a pre-approval in hand limits the ab dealership’s ability to tack on additional interest, if they want to stay competitive.
Where To Get a Motorcycle Loan
There are several types of lenders in the motorcycle loan business, each with its own advantages and disadvantages for the consumer:
- Manufacturer financing. Motorcycle manufacturers want to make it as easy and convenient as possible for consumers to buy their products – especially brand-new. Manufacturers may even create their own in-house finance companies for this very purpose. Manufacturer financing – sometimes called ‘factory financing,’ may be a good solution if you are buying a brand-new bike from a dealer – especially if you have good credit.
Interest rates on these loans tend to be very reasonable, and terms are good for borrowers with good credit. However, you may have trouble qualifying if you have bad credit, and these loan programs may not lend on used or older motorcycles.
Manufacturer lenders often have special incentive programs designed to make certain bike models more affordable. This helps them clear out old inventory to make room for newer models. For example, they may offer 12 months of interest-free financing on certain models. Or they may offer a rebate that can help lower your down payment requirement. Keep an eye out for these kinds of incentives, rebates, and special offers.
- Traditional motorcycle loans. Auto dealerships and motorcycle dealerships usually have a finance department, and this finance department has a regular relationship with several different lenders. Each lender will have different lending criteria. For example, some will want to focus on borrowers with strong credit, and newer motorcycles. Another lender may have more of an appetite for those with weaker credit, or be more willing to lend on older or used motorcycles.
The finance desk will typically take your application and “shop it” to multiple lenders.
This can be very convenient. But you may pay a higher interest rate through the dealers’ finance desk than you would by shopping around on your own and getting pre-approved before you go to the lot.
You should also know that dealers frequently receive kickbacks from finance companies. If they can charge a higher interest rate, they may get a bigger kickback. It’s a good idea to have pre-approval from at least one other lender before you walk onto the lot and discuss financing with your dealer.
- Bank loans. If you have a good relationship with your bank and good credit, you may qualify for a bank loan. Most traditional banks focus on conservative loans. They’ll want to see a good credit history or substantial assets with the bank, or both. They may also be choosier about lending on used or older bikes.
Interest rates may be lower than you’ll find by going through a dealer finance desk. But they tend not to have as many ‘special financing programs’ for those with weaker credit histories, or who need some flexibility when it comes to credit standards.
- Credit unions. Credit unions provide banking services, but unlike banks, credit unions are jointly owned by their depositors. As a result, credit unions often get a lower interest rate on a motorcycle loan than they would get from a traditional bank. Note that credit and underwriting standards may vary widely among credit unions.
- Online lenders. In recent years, a vast new community of non-traditional, non-bank, online lenders has entered the market. Some even specialize in motorcycle lending. Each online lender will have its own pricing and credit criteria, and terms vary widely, so it pays to shop around.
- “Buy here, pay here” financing. “Buy here, pay here” financing, sometimes called “tote the note” financing, means that your lender is the dealer itself. You make your payments directly to the dealer every month.
Use caution when working with buy-here/pay-here lenders. Dealers know that most people applying for these types of loans have very poor credit, and are therefore very high risk. Furthermore, they also know that these borrowers have very few other credit options. They therefore charge very high interest rates, and may be very quick to repossess.
- Private party financing. Buying a used bike direct from a private seller? Some manufacturers have their own lending programs specifically for their own used bikes. Harley Davidson is one prominent example. You can also avoid dealer fees by going through a private seller. Of course, the downside is that you won’t get a dealer warranty, and the factory warranty may be expired.
For most people, it’s best to shop around at several different motorcycle lenders before heading to the dealership.
Interest Rates for Motorcycle Loans
Interest rates on motorcycle loans are usually slightly higher than comparable loans on trucks and sedans. Rates tend to be higher for older motorcycles than new ones and for buyers with weaker credit scores and/or high DTI ratios.
If your credit isn’t the greatest, you may be able to get a better loan by having a family member or friend with good credit cosign on your loan. But be careful: If you don’t make the payments, they can and will go after your cosigner, just as if he or she borrowed the money themselves. That could affect your personal relationship with your cosigner. In most cases, using a cosigner should be a last resort. You may be better off saving to increase your down payment, and improving your credit scores and debt-to-income ratios so you can qualify on your own.
Refinancing Your Motorcycle Loan
Sometimes interest rates fall during the life of the loan. Or you may improve your credit score or get an income increase that substantially lowers your debt-to-income ratio. In that case, you may be able to refinance your motorcycle loan to a lower rate, lower payment, or both.
This could be a good strategy if you financed at a ‘buy-here, pay-here’ dealer, since these ‘tote-the-note’ lots tend to charge a very high interest rate.
Motorcycle Loan Tips
- Know what you can afford. Remember, you need to buy insurance, as well. And when you finance a motorcycle or automobile, it’s not enough just to carry the bare minimum liability coverage. You will need to buy and keep collision or ‘comprehensive’ coverage as a condition of the loan. That may mean substantial additional monthly insurance premiums.
- Shop around. Lenders know buyers fill out multiple loan applications before they buy a motorcycle. Your score might drop a few points when you apply for the first loan. But Applying for multiple loans within a week or two won’t harm your credit score. There’s no downside to shopping around by applying to several different lenders within a short period of time.
It’s also a good idea to apply with multiple types of lenders, so you have a good idea of your options, especially if your credit isn’t the best.
- Get pre-approved. Try to get pre-approved for a motorcycle loan before walking onto the dealer’s lot. Pre-approval gives you a much better bargaining position, since you can take that loan anywhere if the dealer doesn’t give you a good bargain.
- Read the fine print. Be sure to read the loan agreement. Is there a penalty if you pay the loan off early? What happens if you are late with a payment? What is the interest rate? Is it reasonable? When is your first payment due? Can you skip a payment?
- Look over the “extras” and package items. Dealer finance desks are notorious for trying to add extra items into the loan that you may not have agreed to. For example, they may surprise you with dealer financing, an extended warranty program, dealer fees, and other items. These are profitable items for the dealer. They may be hoping you don’t notice them, or are so exhausted by the negotiation process that you buckle under and pay the extra few dollars per month, rather than resist.
- Ask about special programs. Some lenders will have special programs for certain types of borrowers. For example, first-time borrowers, military or veterans, unusual credit situations, etc.
- Be prepared to walk away. Both lenders and dealers should be competing for your business. Don’t fall in love with a bike so hard that you lose perspective. Time is on your side. If you don’t feel you’re getting a good deal, politely say ‘no,’ and walk off the lot. You can save up for a higher down payment or work on your credit score, and shop around some more.
But chances are good the salesperson will come running after you or call you with a better offer, just to keep your business and close the deal.
Brian Allen has been helping people make smarter financial decisions for over 10 years. As the Editor-in-Chief for Goloans, Brian writes about sage financial advice, “how to” articles, and reviews about lenders and creditors.