Since the depreciation of motorcycles is so huge after they are taken off the showroom floor, the potential for a buyer to owe more on their motorcycle loan than they do on the bike is worth quite a bit. Owing more than it’s worth on your bike is often referred to as the world of “upside down.”

Many people in this situation find that financial lessons are sometimes the most difficult and expensive to learn. Motorcycle loans over 48 months (especially without a down payment) put you in the position of owing more than the value of the bike.

Let’s take a look at this phenomenon.

First, the interest calculation your lender uses can make a big difference in your situation, especially in the first 18 months. There are two calculations of main interest, previously calculated (combined with the rule of 78) and simple interest.

Pre-calculated interest combined with the Rule of 78 is usually the worst situation for a buyer because most of the interest is paid in the first 24 months. Therefore, in the first 24 months, a small part of the monthly payment has been used to pay the principal. If a buyer wants to sell or trade the motorcycle within this time frame, they will likely owe more than the bike is worth. Statistics show that the average homeowner trades every 18-24 months.

Simple interest, on the other hand, is much more favorable for buyers as it increases the interest on the loan balance. However, buyers who extend their loans for more than 48 months may still find themselves upside down with simple interest. This is especially true if a down payment is not made. The reason this happens is that the motorcycle depreciates faster than the principal is paid; leaving the balance owed to the lender to be more than the bike can be sold.

A common opinion that many people have is that they will simply hand over their motorcycle to the lender if they find themselves in a “backwards” position. If you are considering this option, don’t do it! Your worries don’t just end after your bike is delivered or recovered; in fact, they are just beginning. The lender will sell your bike at auction for much less than it is worth. You will still owe the difference between the amount you owed on your loan and the amount the motorcycle was sold for at auction. So if you owe $ 5,000 and the bike sells for $ 1,500, you are still liable to owe the lender $ 3,500. To make matters worse, lenders may charge high auction fees that you will also have to pay. So the net result is that you are now responsible for making the monthly payments on a bike that you can no longer ride.

So what steps can you take to avoid getting caught “upside down”?

1. Find a lender that uses simple interest. Avoid lenders who use pre-calculated interest / Rule of 78 calculations.

2. Always try to put money in your purchase.

3. Try to avoid motorcycle loans that extend beyond 36 months.