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Loan shark interest rates to buy an RV? How MSRP prices are set (good question!). And RV financing nightmares!

Would you take out a loan you knew you could never repay?

Would you pay Mafia loan shark interest rates for an RV loan?

There are situations where RV financing is a little of both.

The upside-down RV loan

During the RV buying frenzy that began in 2020 and only began to subside in the second quarter of 2022, there have been many anecdotal accounts of buyers paying premium prices for RVs and financing them over long terms. In many instances, those long-term RV loans will leave them “upside down” in the loan at some point before they make the last payment. The longer the loan term and the lower the down payment, the more likely that depreciation will outrun the principal, and the buyer will be in a “negative equity” position.

The concept of negative equity arises when the value of an asset (which was financed using debt) falls below the amount of the loan/mortgage that is owed to the bank in exchange for the asset. It normally occurs when the value of the asset depreciates rapidly over the period of use, resulting in negative equity for the borrower.

Corporate Finance Institute

Survey of RVtravel.com readers:

Negative equity

This negative equity position could create a financial disaster for the unwary RV buyer. Over the past two years, thousands of buyers have entered risky territory on RV depreciation and value.

Here is an example in a simple illustration, using round figures and an interest rate typical for RV financing at the time of this writing. Let’s say you elect a 20-year loan to finance your RV purchase.

RV Price $100,000
Down Payment (10%) $10,000
20-Year Loan Amount $90,000
Payments (6% APR)        645
Interest Paid $74,239
Total Amount Paid $164,239

 

Immediately upon leaving the dealer’s lot, the RV depreciates as much as 25%, with another 10% reduction in value during the first year of ownership, making the $100,000 RV worth $65,000 at the end of year one. During years 2-5, the RV will typically depreciate 15%-18% per year. After ten years—only halfway through the 20-year RV loan amortization period—it will have lost 60% of its value and be worth $40,000.

But your loan balance at that point is still $57,724!

If you decided to sell the RV at that point, you would need to pay $20K out of pocket to cover the remaining loan balance. Had you chosen a 15-year loan, your payment would be higher—$759 per month. But because of paying a bit more principal earlier in the amortization period, your ten-year balance remaining would be down to $36,441. Still, that is just a little over $3,500 more than the depreciated residual value of the RV at that point, and that is if the RV is in excellent condition.

Here is a live Amortization Calculator that will illustrate the effects of payments and depreciation over the life of an RV loan.

When seated at the RV dealer’s desk, many prospective buyers are so excited about their new RV that they can already smell the campfire smoke and taste the S’mores. They don’t always pause to assess the significant financial impact of their purchase decision. All RVers who have entered a new RV showroom or attended RV dealer shows have been there. Think of it as temporary insanity. Remember that, particularly if you intend to finance the RV purchase, you are making decisions that will affect your financial life in a big way for as many as 10-20 years.

Forget MSRP for RVs

The purchase negotiation usually starts with a peek at the dealer’s pricing sticker on the RV window on the sales lot or in the showroom. You will probably see a (large) number referred to as the “Manufacturer’s Suggested Retail Price” (MSRP). It is a number that one prominent industry expert, Kevin Frazer at Cheyenne Camping Center in Walcott, Iowa, says is pure fiction. “There really is no formula to determine MSRP. It’s all politics. It’s used to deceive… get rid of the idea that the MSRP has anything to do with the real world.”

Frazer discusses this issue in a brief but eye-opening episode of Wingman Wisdom with Alan Warren on YouTube. The video’s title is “RV Dealer calls B.S. on MSRP’s of new RVs.” Kevin Frazer has been in the RV business for 50 years and offers a lot of insight on new RV financing and many other facets of RV purchase and ownership.

That sale price sticker will likely be adorned with charges over the price of the RV itself, such as “Factory Freight,” “Dealer Prep,” “Pre-Delivery Inspection,” “walk-through,” etc., and something called a “dealer fee.” These are the same ambiguous-sounding fees and charges you see on the sticker of a new car in a dealer’s showroom. At the height of the market in 2021, the dealer would likely hold close to that sticker price in negotiations.

Due to a slowdown in sales, things may have improved for buyers in recent months, but the dealer’s goal will always be to sell as closely as possible to the sticker price. There are ways to negotiate a better price on an RV, which is the subject of a different article. However, if the parties reach a mutual agreement, the buyer will pay the dealer in full or arrange retail financing.

RV financing is different than car financing

Unlike automobile dealers that are usually very closely affiliated with the major car brands they sell, there are no “captive finance” companies (e.g., General Motors Acceptance Corporation, Ford Motor Credit, etc.) in the RV industry. Consequently, RVs are mainly financed through banks and credit unions. While credit unions tend to have less stringent rules on credit scores and may offer their members slightly lower interest rates and lower down payments, banks tend to lend at higher interest rates and require minimum credit scores in the mid-600s or higher. If your credit rating is an issue, i.e., a score below 600, you may still obtain RV financing, but you will be required to make a larger down payment and pay higher interest rates. (A survey of “bad credit” RV financing reveals interest rates as high as 17%-24%. At 17.5%, that $90K loan would end up costing the buyer more than $101K in interest over a 10-year loan, with a total payment approaching $200,000.)

Do not forget that RV ownership and operation costs continue beyond driving off in a brand-new RV. Here is a short list of ownership and operations costs:

• Licensing (An initial and annual fee in most states)
• Insurance (Premium for coverage of value of new RV plus liability coverage)
• Fuel
• Routine maintenance (RVs usually have only a 1-year warranty that does not cover regular maintenance. An oil and filter change can run $400-$1,000 on a diesel motorhome.)
• Unexpected maintenance and repairs (A sudden unexpected $10K repair can ruin many a night’s sleep.)
• Towed vehicle cost, setup, maintenance, and insurance (Optional but worth considering.)
• Campground Fees
• Tires (at approximately five years)
• Storage

Caveat Emptor

Owning and traveling in an RV should be a great pleasure and a genuine lifestyle enhancement, provided planning and a realistic financial assessment goes into the purchase and ownership equation. Financing a six-figure RV purchase and enumerating the costs associated with RV travel can be a sobering experience. However, it is far better to see and understand the costs going into the ownership proposition than to endure a financial debacle that could spoil your RVing experience.

TO BE CONTINUED

##RVT1081b

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Lisa Williams
1 month ago

Yes, I could sell my RV tomorrow for more than I paid for it. However, I love it and I’m not selling it anytime soon. I researched the type of RV suitable for me in advance and looked all over the country for the one I wanted since I live in it full-time.

The most expensive and time-consuming portion of my decision was the 4,000-mile round-trip drive to go get it (from Las Vegas, NV to Macon, GA)! So, I stopped to visit family and also enjoyed the sights along the way to help justify the cost of gas.

I purchased a 2016 Casita trailer in June from Camping World with a loan from my credit union that I negotiated beforehand, at a 5.5% rate. I also put $7,000 cash down on it for that lower rate. I would not have taken a loan from CW, the rates were too high.

Last edited 1 month ago by Lisa Williams
Bill
1 month ago

As mentioned below, that $10,000 down payment is still part of the Total Amount Paid which should be $174,239.

Bruce
1 month ago

Remember someone who worked for me buying a house before the last bubble burst. At first I was like good for you saving up and such. Then told they only had a small down payment and was a large place. I said surprised you could get a loan that large, knowing what she made with me and knowing her husband didn’t make much. Her comment was the bank approved it and they must know what they are doing so who are we to question. Course 3 years later it got repo’d. Same thing here with RV’s

Timmy V
1 month ago

We play in the shallow end of the RV pool for sure (Aliner). Took out a five-year loan for our first one, paid it off in two years, sold it recently for almost what we paid for it. Bought a bigger one by loaning ourselves a couple thousand dollars from our home equity line to make up the difference. We left the dealer with title-in-hand and have already paid off our “loan” to ourselves but even THAT took us way outside our comfort zone. I get a panic attack just reading about 20 year loans on a depreciating asset, something worth nearly $0 at the end of the loan, probably not even operable. Not to mention incurring how many thousands of dollars of repairs in between. I guess there wouldn’t be an RV industry if people didn’t do this, but wow.

MattD
1 month ago

Abusive, unfair and predatory lending practices are illegal. So the loan originator will always disclose all aspects of the loan to the buyer. If a buyer can’t comprehend what negative equity is, as the example stated above, then it’s just too bad on them, they shouldn’t be financing in the first place. If their emotion is stronger than common sense they deserve what they’re left with when the shiny wears off. However, the REAL tragedy is when these banks lend that amount of money on an inferior, defective or unusable product in the first place!

Les
1 month ago

Not to be morbid…I would like to see the percentage of RV loans not fulfilled because of death. If someone knew they had just a few years to live, would it be best to get a 20 year loan?

MrDisaster
1 month ago
Reply to  Les

The estate would be liable for the loan. Same if repossessed. Co-signer? Then they are on the hook for the remaining balance. Community property or joint ownership, then the surviving party is on the hook. The only way to make your scenario work would be for a single person to have the loan without any estate. Then whoever is holding the paper (title and loan) would get the rig and ability to resell it.

captain gort
1 month ago

Greed + stupidity = the current situation.

Gary
1 month ago

Since when is 6% a “loan shark” rate?

Lonewolf
1 month ago
Reply to  Gary

I believe the author was talking about the “bad credit” rates ranging between 17%-24%.

Kevin Hogle
1 month ago

On the same subject:
The car/truck dealers in southwest Utah, and it looks like all vehicle brands, have been absolutely ripping people off for at least two years. MSRP plus 30-40k on some larger trucks like 1 tons. They’re still just pickups and will wear out. I can’t imagine how much the payments are or how many years. I’m thinking this is a disaster in the making. I’m just surprised how many people are willing to pay that much over MSRP. It used to be MSRP minus a hefty discount.

I think we are in for a huge reset.

Spike
1 month ago
Reply to  Kevin Hogle

I think you are correct. During the pandemic savings rates went way up…over 30% of income based on most of what I’ve read. Currently the personal savings rate has dropped to around 3%…a low not seen for a long time. Borrowing against 401k retirement funds has been growing. Interest rates will continue to rise to curb the economy and reduce the rate of inflation. Layoffs will start to occur as revenues decrease and costs need to be cut. All that and record spending on gifts over the last few weeks, much of it on borrowed money.

Not many people with much financial wisdom nowadays.

Bob M
1 month ago

Credit Unions don’t always give it’s members deals on loans anymore. Our government has put so many requirements on credit unions that most of small credit unions had to merge with larger credit unions. The large credit unions are like banks. They have to hire CEO’s who want large salaries, large retirements (SERP) and benefits. Plus they have to hire staff and pay for their benefits including equipment to operate the Credit Union.

Lisa Williams
1 month ago
Reply to  Bob M

I want to give a shout-out to my credit union, BECU. I have a car loan through them which is almost paid off. They gave me a great rate on my trailer loan back in June, just 5.5%. I did put over 20% cash down on my trailer purchase, which helped with the rate.

Jeffrey L Kirk
1 month ago

In the car dealership the finance people, the ones that you sit down with that arranges the financing and you sign the contracts with traditionally make the most profit for a dealership. I would think that this would hold true for RV dealers also. Here are just a few examples that have been done.
First finance dealer rebates. Here is how that works the dealership gets you approved for a loan at a lower rate than what you sign for and the difference is given back to the dealership as a rebate.
Second if the actual sale price is not set the down payment for approval will go up but the loan amount will remain the same.
Third “Mistakes” the sale price is slightly higher than agreed on.
Forth Add Ons that have not been discussed such as paint sealant, undercoating, vin etching the list goes on and on and on.

John the road again
1 month ago

In principle, this article is right-on regarding financing. Taking out a 20 year loan on anything that is mostly depreciated in half that time is crazy. If you are not affluent and wish to remain not affluent, this is a great way to do that.

Also, we’re currently in even crazier times. I just got a letter from the dealer we bought our TT at in 2019. They’d like to buy back our TT for what we paid for it! Of course, replacing it with the same unit today would cost another 30% to 50%. So no on that.

Neal Davis
1 month ago

Excellent article; thank you! Such valuable information and necessary warning. The downside is that those who do not read RV Travel are probably those who most need this information. However, those of us who do subscribe and read need this sort of reminder too.

Michael Thomas Lloyd
1 month ago

Don’t forget “Personal Property Taxes” in states like mine (Virginia). Buying a pre-owned coach for $100,000 will first result in paying a sales tax when registering the vehicle with the DMV of $4,150 (4.15%), then annual personal property taxes (depending on which county the RV is “garaged” or stored in). In this example, the first year will be about $4,000! (then decline annually by perhaps 10% in subsequent years)

BobG
1 month ago

Also, sales tax needs to be figured in during the original purchase. In our state of Tennessee, the rate is 7%.

MrDisaster
1 month ago
Reply to  Randall Brink

Taxes and fees are usually baked (added) into the loan. So worse that just the tax yu end up paying interest on it (within the loan!

Sandi Pearson
1 month ago

My conscience would never let me finance a depreciating asset (that’s an oxymoron to begin with) . We purchased a 2017 DP in 21; the previous owner had to supply nearly 40,000 dollars to meet the deficit in what he owed and the price he was selling for. He could and did…Either way you are going to lose money on this rapidly depreciating toy. Its retirement for us, we planned for it, set a budget and are prepared to lose probably one third of our “investment”. But oh the memories we are making!

Rick K
1 month ago

People have been buying automobiles like this for years, why would an RV be any different? Once you sign on the dotted line, you’re accepting everything in the contract. Won’t be long and we’ll see the buy here/pay here RV dealers.

Brad G. Hancock NH
1 month ago
Reply to  Rick K

Nobody in the automotive industry offers 20 year loans.

Rick K
1 month ago

Yes, but they’re up to 7+ years with the same net effect, negative equity.

warmonk
1 month ago

Is my math wrong? In your first example of negative equity, it seems to me that you would be paying a Total Amount of $174,239 (100,000 purchase price plus 74,239 interest) not $164,239 as stated.

Ron Yanuszewski
1 month ago
Reply to  warmonk

Right, $10k down payment.

Bill
1 month ago

Right, that $10,000 doesn’t just disappear (well, actually it does) but it definitely remains as part of the total cost of the loan.

Greg
1 month ago

We negotiated a price with a dealer in Florida, When they added $5000.00 in fees we walked away. Purchased a very nice used 5th wheel toy hauler.

MattD
1 month ago
Reply to  Greg

GOOD for you! Please tell us who the dealer was

Last edited 1 month ago by MattD

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