An RV can be a very expensive buy. But who said that you have to have the money to pay it upfront? After all, there are so many RV financing opportunities out there that you could make use of!
With that being said, let’s try to understand how to finance an RV and what you should pay special attention to.
How To Finance An RV
Let’s first begin by overviewing the ways of RV financing. Those are financing directly with the dealership you are buying an RV from or financing with a third party like a bank or credit union.
Each of these options has its pros and cons, and we can’t say that one is clearly better than the other. Deciding which option is better for your budget and convenience is up to you. But to help you a little, let’s have a look at the advantages and disadvantages of either way of RV financing.
Financing through the dealer often isn’t the most cost-efficient way to go, but there nonetheless are some bonuses that come with dealer financing.
The main advantage of RV financing through a dealer is quickness. You don’t have to address any third parties in order to arrange an RV loan. Everything can be done in a matter of minutes on the spot without you having to go back and forth between the dealer and a financing institution.
Aside from that, you can sometimes come across time-limited promotional offers with very low-interest rates. Third parties like banks and credit unions usually don’t offer any discounts on their financing rates.
With that being said, financing through an RV dealership isn’t always the most cost-efficient way to go. Dealer financing can be convenient, but you will have to pay for that convenience.
In order to allow RV financing for customers, RV dealerships work out deals with financial institutions. Essentially, an RV dealership serves as a middleman between you and a financial institution. And the bad thing here is that dealers add their own markup on the loan, so you are ending up paying more than you would if you directly dealt with a lending institution.
This doesn’t mean that dealer financing can’t be beneficial. If you are sure that the dealer will help you with finding the best deal, you may work with them.
The best thing about bank or credit union financing is that you are dealing with plain consumer financial rates without any markups imposed by the dealer. In terms of cost efficiency, financing through a bank is often the best option.
Aside from that, if you’ve worked with some bank for a long while, you can be confident that they will work with you to find a great deal, as well as that no hiccups will happen in the process.
On the other hand, the not so good thing about financial institutions is that they offer the best deal possible with no room for negotiations. You either take it or leave it.
Aside from that, financing through a third party may take some time due to running back and forth between the dealership and the bank, as well as due to the application processing times.
The importance of numbers
Be it a bank or a dealership, which party to finance an RV through ultimately depends on numbers. When choosing between dealer and bank financing, numbers play a role when agreeing on things like interest rate and loan term.
Knowing the numbers that you will have to pay is important so that you can get the best deal. Things can get pretty complicated though for a first-time customer, so we’d like to cover a couple of crucial things that you should know about when it comes to the costs of RV financing.
There are more or less complex financial calculations behind the scenes, but we won’t dive too deep into them so that you stay on board with us.
What is interest?
When you take out a loan, you will have to pay back the base amount that you have borrowed, as well as some interest on top. If you finance a $75,000 RV, you will have to pay not only those $75,000 but also added interest, the amount of which will depend on certain factors that we will overview in a bit.
Interest essentially is the fee that you pay for using the money of a bank or a credit union. Interest allows financial institutions to make a profit from their deals.
Typically, the repayments that you need to make on a loan are made up of two components – a component that reduces the amount you owe for the principal amount (the sum that you borrowed) and a component that covers the interest on the loan.
How much interest you have to pay for the financed RV mainly depends on the interest rate and the term of the loan. If you know these two, you can calculate the monthly payments you will need to make (including both the repayment for the loan and interest), as well as the total amount of interest that you will have to pay throughout the loan.
The total amount of interest that you will have to pay on the loan is the thing which will determine the cost-efficiency of a loan. Generally, you’d like to go for a loan that implies lower total interest, but this will depend on your needs.
Now that we understand the basic things that you will need to deal with when financing an RV, let’s discuss the factors that impact the amount of payable interest on RV financing.
Factors that impact the amount of interest
As we mentioned above, the total amount of interest you will have to make depends on the deal’s interest rate.
In RV financing, the interest rate is usually defined annually in percentages. However, since loan repayments are usually made monthly, the interest rate is adjusted to months by dividing the annual interest rate by the number of payments made in a year (=number of months in which you will be making repayments).
The interest rate by itself is crucial in RV financing, but there is more you will need to know in order to find out how much interest you will have to pay in total. There are certain main factors that impact the total amount of interest to be paid for the loan.
To more vividly demonstrate the effect of changing these factors, we will be using an RV loan calculator by Mortage Calculator. To keep things simple, we won’t dive into the financing aspect of loan calculation and will just put in numbers to make the effect of the important factors understandable to you.
The loan term is the most important factor in calculating the total interest of a loan. The loan term is the time period throughout which the repayment of the loan is evenly distributed.
Typically, RV financing is arranged for 5-15 years, with some institutions allowing 20 years. At a fixed interest rate, the longer the loan term, the lower the monthly payment, but the higher the total interest. This means that while longer loans are easier on your budget in the short term, they are much less cost-efficient in the long term.
Let’s take an example with $25,000 vehicle price, 6% interest rate, 10 and 20 years of loan term, and everything else set to 0. If you plug these numbers into the calculator, you will see that:
- For a 10-year loan, the monthly payment is $277.55 and the total interest is $8,306.15.
- For a 20-year loan, the monthly payment is $179.11 and the total interest is $17,985.86.
This clearly demonstrates what we described above. With an even longer loan, you may have to pay more interest than the RV will be worth at the end of the loan!
In reality, however, interest rates get lower as loan terms get longer, which reduces the actual difference between interest. Longer-term loans still imply higher total interest, however, so you should go for a shorter-term loan if possible.
A down payment is a payment that you make up-front for a loan. A $10,000 down payment reduces the principal amount owed by $10,000. If you don’t take tax into account, $25,000 with a $10,000 down payment is the same as a $15,000 loan with no down payment.
Let’s take the above numbers, as well as a 6% interest rate and 10 years of duration as the basis of calculation. We get:
- With no down payment, the monthly payment is $277.55 and the total interest is $8,306.15.
- With a $10,000 down payment, the monthly payment is $166.53 and the total interest is $4,983.69.
If you type in a $15,000 vehicle price with no down payment, you’ll get the same numbers as with a $25,000 loan with a $10,000 down payment if the sales tax is set to 0%. If the sales tax wasn’t set to 0%, there would be some differences between these loans since sales tax applies to the vehicle price without deducting the down payment.
You probably know that trading in your older RV allows you to get a discount in the amount of the estimated value of the RV. Trading in your older RV, you are essentially making a down payment.
Things are a bit different if you still owe anything for your old RV to a bank or the dealership. If you still owe $5,000, the loan amount will be increased by those $5,000.
Your credit score has an effect on the interest rate. The higher your credit score, the lower the interest rate will be for you. Shopping around, you can still find a good deal with a sub-par credit score, but generally, if you have a bad score, you will mostly find higher rates, as well as outright rejected.
9 things that you must know about RV financing
1. You may need to use the RV as collateral
Many RV loans are secured by the vehicle itself, meaning that the RV acts as collateral to guarantee the loan. If you are unable to make the monthly payments, the lender may repossess your RV. Some lenders do offer unsecured loans, but their interest rates tend to be higher.
2. Loan terms will vary between lenders
Don’t rush to sign a contract – instead, shop around to find the best deal. RV financing terms may vary significantly from lender to lender, so make sure to do research to find the best party to work with.
3. You could end up paying more than the RV is worth
Perhaps the worst thing about RV loans is that you could end up paying more than the RV is worth. This can happen if you go for a loan with a very long term. Add to this the fact that RVs depreciate rapidly, and it’s really easy to pay much more than you should.
4. You can negotiate with dealerships
It is a known fact that brand-new RVs can have 20-30% markups on their actual price. Due to this, dealerships can actually afford to go down the initial price quite significantly.
To get the deal though, you need to make a realistic offer. To do this, you need to find out the bottom line for the RV by researching RV prices elsewhere on the market. Pay special attention to the cost of used RVs that are no more than 1-2 years old.
5. Pre-approval through a bank can be beneficial
Before paying a visit to a dealership, it may be beneficial to get pre-approval from the bank and take the papers to a dealership. You may use the bank papers as a bargaining tool to possibly get a better deal from the dealership.
6. You can get mortgage interest tax deductions
If you didn’t know, you can actually write off your RV loan interest as mortgage interest for some good tax deductions. However, this only works with self-contained RVs – those that have cooking, sleeping, and toilet facilities.
7. Down payment will benefit you long-term
Lenders often require customers to make at least 15-20% down payments on the loan. Some allow as low as 10%, but you really should pay as much up-front as possible. This will benefit you in the long term since it will reduce the total interest you will have to pay.
8. Starting small can be the best option
If you can’t get yourself a big RV now, a great alternative would be to start smaller. In the future, you may be able to trade in your smaller RV to get some discounts on a new RV financing deal.
9. Pay attention to how the interest rate is calculated
Make sure to go for a loan with a simple interest rate. With such a rate, you will pay interest on the amount that you owe at the moment, and the monthly interest will get reduced with each payment.
If you liked this article, you might like our other RV how-to articles.