Motorcycles have high depreciation as soon as they're removed from the showroom floor. This causes people to owe more on their motorcycle loans than the bike is worth. Owing more on your bike than its actual value is known as negative equity. These lessons are amongst some of the hardest to stomach in the industry. Motorcycle loans with 48 month repayment terms (especially without down payments) put you in the position of owing more than the bike's value.
Take a look at this.
First, the interest calculation your lender uses can make or break the situation, especially in the first year and a half. There are two interest calculations: simple interest and pre computed with the rule of 78.
Pre-computed interest with the Rule of 78 is a terrible scenario for a buyer because the first 24 months is when most of the interest is paid. Therefore, in the first 24 months the principal is not touched. If a buyer wants to sell or trade the motorcycle in this time period they will likely find themselves owing more than the bike's value. It is shown that every 18-24 months, a bike's owner changes.
On the flip side, simple interest is better for buyers since interest starts accumulating on the loan's balance. However, buyers that extend their loans for more than 48 months can find themselves in the up side down position even with simple interest. If a down payment is not made, this is especially true. Since depreciates faster than the principal is paid, it leaves the balance owed to the lender to be more than the bike can be sold for.
A large scale conception that many people have is that the motorcycle should be given back to the lender if they are caught in this position. Don't even think about it! After your bike is surrendered or repossessed, you should still worry. To start, your bike will be sold at an auction for less than it is worth. The auction price will be subtracted from the price you paid for it. So if you owe $6000 and the bike sells for $1500, you still are responsible for owing the lender $4500. You can even get hit with auction fees so you will end up making monthly payments on a bike you're not even using.
What can you do to prevent being caught in this "negative equity" situation?