Deciding whether to finance an RV or camper purchase is a complex decision that requires careful consideration. While the immediate convenience of owning the vehicle is tempting, it’s essential to evaluate the long-term financial implications of taking on debt. This article aims to provide insights into financing options and factors to consider when contemplating an RV or camper loan.
The Power of Compounding Interest
As Albert Einstein purportedly said, “Compound interest is one of the most powerful forces on Earth.” In the case of loans, this force works against you. Even with a simple interest loan, the interest accrued over time significantly increases the total cost of the RV or camper. A typical RV loan with a 6% APR over ten years can increase the overall payment by 32%. For instance, a $50,000 RV would end up costing $66,000. Financing an RV entails paying a premium for the convenience of immediate ownership.
Understanding RV Loans
Taking out a caravan loan through a broker are structured as simple interest loans, where interest is only charged on the principal amount rather than accumulated interest. However, opting for a simple interest loan can add thousands of dollars to the total cost of purchasing a camper. For example, a $50,000 loan financed at 6% APR for ten years would result in a monthly payment of $555. By the end of the loan term, the interest paid could exceed $16,000.
Expanding the loan term to twenty years reduces the monthly payment to $358, but the interest paid more than doubles to almost $36,000. It’s important to consider whether paying 20% to 100% more than the sale price aligns with your financial goals and comfort level. Fortunately, alternative options exist beyond traditional loans.
Interest Rates and Considerations
RVs and campers are considered luxury items, often leading to higher interest rates compared to loans for cars. Current rates range between 4% and 20% depending on factors such as loan size, duration, down payment, and credit rating. Extensive online research reveals loans with terms ranging from one to twenty years. Generally, longer loan terms result in lower monthly payments but significantly higher interest payments over time.
Purchasing a new RV or a slightly used model (one or two years old) and having a good credit score can help secure lower interest rates. Older RVs, similar to older cars, pose higher risks due to their advanced age and depreciation.
Leveraging Loan Amounts for Better Interest Rates
Interestingly, banks often offer slightly better rates for loans over $10,000. For example, there might be a 3% difference between loans ranging from $1,000 to $9,999 and loans of $10,000 or more. This means that a higher monthly payment may be required for a less expensive RV. For instance, a $10,000 loan at 9% APR amounts to just under $127 per month, while a $9,000 loan at 12% APR costs around $129 per month. Although the difference may seem small, it could enable you to add a few extras to your purchase while keeping the monthly payment the same.
Loans exceeding $50,000 often come with even lower interest rates. This provides an opportunity to consider a larger RV than initially planned, allowing for more space and accommodating future family growth. For example, purchasing a 24-foot trailer instead of a 19-foot trailer may become feasible.
Predicting Future Needs and RV Depreciation
When selecting an RV or camper, it’s crucial to consider the pros and cons of the available space and amenities and how they might affect your family’s needs in the next five years. By doing so, you can determine your willingness to spend and finance an RV accordingly.
Keep in mind that the moment you drive a new camper off the lot, it begins to depreciate in value. Understanding the estimated resale value is important in estimating the necessary down payment. A 20-year loan with little to no money down can result in being “upside down” on the loan, meaning owing more on the loan than the RV is worth. Being upside down can pose risks when attempting to sell or trade in the RV, potentially requiring additional funds to cover the difference.
Down Payments and Financial Stability
When financing an RV or camper, it is generally recommended to make a down payment of at least 15% for loans with a duration of ten years or less, and 20% or more for longer-term loans. Some lenders may require this minimum down payment. A down payment of 20% or more can help secure better interest rates.
Planning Ahead and Obtaining Pre-Approval
Before visiting a dealer, it is advisable to seek pre-approval from a local bank or credit union. This provides an understanding of the interest rates available and helps determine how the monthly payment fits into your budget. Pre-approval empowers you to make informed choices and compare dealer financing options using tools like the “EZ Calculators” app.
Leveraging Calculator Tools
The “EZ Calculators” app offers various financial calculators to estimate loan costs. The auto calculator considers trade-in value, taxes, and dealer fees, while the home calculator provides an amortization chart. The amortization chart reveals the remaining loan principal after each monthly payment, allowing you to track progress. By inputting extra payments, you can observe how additional contributions reduce the loan balance and save on interest. The app helps visualize the impact of interest on loan costs and encourages budget-conscious decision-making.
Alternative Options: Saving and Starting Small
For those who prefer to avoid loans, saving for an RV or camper is a viable option. By patiently saving over time, you can reduce or eliminate interest payments altogether. For example, saving $185 per month can accumulate $10,000 in approximately 54 months, potentially saving over $1,000 in interest. Financial advisors or planners can assist in creating a savings plan and exploring opportunities to earn interest on savings.
Starting small by purchasing a used tent camper that can be towed with an existing vehicle is another option. This allows for gradual saving toward a larger RV or a combination of savings and loans.
Going Full-Time and Tax Implications
For individuals nearing retirement or those who have saved enough to purchase a high-end RV (e.g., a $200,000 class A motorcoach), consulting a financial advisor is recommended. Pulling out a large sum of cash can have tax implications, making financing a potentially better option. Evaluating the potential returns on investments versus the interest paid on the loan is crucial to make an informed decision.
If selling a home to fund an RV purchase, it’s essential to anticipate depreciation and start saving for the next RV immediately. This approach allows you to earn interest on savings rather than paying it to lenders.
Conclusion: Informed Choices for RV and Camper Financing
When considering an RV or camper purchase, thorough information gathering is essential to make informed choices. Understanding the implications of interest rates, depreciation, loan terms, down payments, and pre-approval allows you to evaluate your financial limits and make decisions aligned with your long-term goals. Armed with knowledge, calculators, and a clear understanding of your budget, you can confidently navigate the financing options and secure the best possible outcome when acquiring your dream RV or camper.