The only reason I can imagine most of you reading this is if you have already read the rest of the internet… even the dark web. Talking about financing and interest rates aren’t typically the sexiest things on the internet, but understanding how some of this works can make your buying process much easier.
Let’s talk about risk. If you have ever had the chance to sit down with me and go over financing options I would have undoubtedly brought up risk. It’s one of the most important thing any bank will take into consideration before giving a loan. In my head I picture a gauge: Low credit score? Risk goes up. No down payment? Risk goes up (How Much Do I Need to Put Down?). Shorter term? Risk goes down. Low debt to income ratio? Risk goes down. There are thousands of factors a bank will take into consideration.
One of those is the collateral. Collateral is what you are using for the bank to hold in exchange for money. If you give them cash, also known as a secure loan (Why Finance When I Have Cash), you will usually get better interest rates than if you give them nothing, known as a personal loan, or line of credit.
That brings us to buying luxury item vs a necessity. The home you live in is considered a necessity. The car you bring your kids to soccer practice in is considered a necessity. The jet skis you bought three years ago and haven’t touch since that first summer are an example of luxury item. It’s something the bank believes you do not have to have in order to function in everyday life.
Here is another way to think about it. I was doing this job in 2007-2008 during the crash. When money started to get tight for people and they did not have enough to make all of loan payments they had to make cuts. They looked at the home that their family lived in and kept the rain off their heads. They looked at the car they used to bring the kids to soccer, get groceries, and get back and forth to work. And they looked at the motorcycle in the garage - which they loved and still brought them much joy but suddenly became much less important when it comes to providing for the family. I think you know what most people chose to stop paying on. Hell, some of you might have been those people and I do not blame you. But that brings us back to risk.
It’s rare that you see rates on motorcycles as low as cars or homes, does that mean it never happens? Of course not. There are exceptions to every rule and if you can find ways to lower risk (more down payment, shorter terms, co-signers with better credit) your chances of getting lower interest rates go up.
If you’ve made it this far I am very impressed, and feel like you might need a hobby… like riding a Harley-Davidson (Where to Ride a Motorcycle in the Bay Area). If you disagree with anything I have said, or think I might be wrong feel free to troll away. At least I’ll know someone has read this to the end, and I might learn something new.