When financing a new RV there is a lot more to consider than just the sticker price or monthly payment. In this article, I’ll discuss crucial factors such as depreciation and interest.
The bottom line for most people when purchasing an RV, or even a car, is the monthly payment. This was a mistake we made when we purchased our Heartland Cyclone brand new. We definitely love the product, but would have done the purchase differently if we were financially smarter at the time. Let’s walk through the true cost of an RV using a fictitious example.
The Standard Purchase Methodology
The purchase price of our fictitious RV is $100,000. Using traditional thinking, we know that we can only afford a payment of approximately $750. So, we go to the dealership with that payment in mind, ignoring the overall complete cost. Predictably, after the desired RV is selected, the salesperson asks two questions.
- What monthly payment can you afford?
- How much are you willing to provide as a down payment?
This will typically start the “negotiation” process. As an example, let’s say the response is a goal of having a $750 monthly payment and a down payment of $5,000. Everyone knows what happens next – the salesperson cannot actually negotiate with you. There is a mystery person in a back office that every salesperson goes to. Does this master mathematician of pricing actually exist? Who knows, but the salesperson will come back with an offer. The offer will be amazingly close, but slightly more than what you wanted to pay initially.
The Offer
The salesman returns and asks if it is possible to put down a little more than planed. If so, the payment can be very close to $750. After a couple of rounds of negotiation with the mystery man in the secret room, the “negotiation” ends with an agreement to pay $763 per month after putting $7000 down. With the down payment and your “great credit score,” the loan is 5.25% for 15 years. So, $93,000 is financed at 5.25% with a monthly payment of $763 for 15 years. Sounds great, right? You leave the dealership happy with your purchase and the peace of mind of a 2-year warranty on your 15-year purchase.
What it Really Costs
Hopefully, the RV is everything it was expected to be and you want to keep it for many, many years. However, most RVs are traded after three to five years. In addition, the average RV can depreciate between 25% & 40% within the first one to two years. In this example, the $100,000 RV is only going to be worth between $60,000 and $75,000 very shortly after purchase. This can be considered a “good times with the RV” cost because it will never be recovered from a trade-in or private sale.
But wait, there’s more! Making the $763 payment every month will pay off the RV in 15 years. Along with the cost of the RV, the 5.25% interest rate adds up to an additional $40,000+ in interest. This means that the total cost would be $140,000 for a product that quickly becomes valued somewhere between $60,000 and $75,000. This is what the bank wants because it makes them the most return on the loan.
What Can Be Done
The most ideal approach to take to the purchase is to pay cash. But really, most of us cannot afford to pay that much for an RV in cash unless the money was accumulated and saved for several years. So, one option is to wait until the money is in the bank and then make the purchase. In this option, the $40,000 in interest is avoided, but the large drop in value from depreciation is not.
A second option is to buy a used RV that fits within the budget and allows for a cash purchase. The average trade-in time, as indicated above, is three to five years. Many of the RVs in this range have several years of use left in them. This method allows for someone else to “pay” the huge depreciation in the first couple of years. In this option, interest is avoided as well as depreciation. This really is the ideal option for RVers who want to be debt free and live on a reasonable budget.
Lastly, do the homework before making the purchase. The dealership and private seller will not talk about the historical depreciation of the RV model you are considering. This would not be counter to their goal of maximizing profit. Review what two- to three-year-old models are selling for. Also, scour the Internet for information on problems related to that model along with impressions from people that own it. The more information gathered before negotiating the purchase, the better the decision will be on price.
Feedback
We are interested in your feedback/advice on the RV purchase. Please let us know if you have any tips or tricks you used when purchasing your RV.
Great article. I made the same rookie mistake on my first RV. After a year I discovered it wasn’t going to work for me to full-time in and I lost my ass on the trade-in. I learned my lesson on the 2nd purchase and bought a 2-3 year old motorhome with low miles.
One tip I would add is to make extra payments whenever possible. Even just an extra $100/mo can shave upwards of 3 years of payments off that 15 year loan. And since that extra payment goes straight towards the principle it’ll help keep you out of the red on your next trade in.
Your comment is spot on. Thanks for the input. Our goal is to have it paid off in the next year or two and not get in the “upside-down” situation again.
Thanks again for contributing to the information!
If you have to finance an RV…then you actually can’t afford it in the first place.
Great point!
I disagree, If you can’t afford the upkeep then you can’t afford the RV. My reason for looking at a class b RV is so, I NEVER have to use public bathrooms again. I would love to be able to park in a rest area and actually be able to rest.