HOW TO BUY THE RIGHT RV: SETTING A BUDGET
Setting a budget is simplified considerably when you’re sure you will pay cash and do no financing. All you need to worry about is the simple purchase price and the cost of any extras you may wish to add to the RV. Your budget limits are set by your bank accounts and your willingness to spend. The main problem you face is fitting the right RV into your budget. Decide how much you want to put into your RV purchase and get busy finding the best RV to fit.
Many people do choose to finance their RV purchase. RV financing has the added benefit of providing tax-deductible interest to your tax return. RVs are considered second homes and the interest may be deducted from your federal income tax as long as you aren’t already deducting interest on two homes. For more information, see an accountant and refer to IRS Publication 936 (January 1989). Also, if you’re in business or want to start one, owning a RV can be a huge tax advantage.
“Interest on RV loans is tax deductible for most people!”
If you’re planning to finance, you will be working with several areas of budget concern. Your primary concern is the monthly payment and then the initial investment or “down-money” required. The total selling price, the financing rate, and the term of the loan are also very important.
How Much “Down-Money” Do You Need?
Most RV financing sources require a down payment in the 10% to 20% range. There are some that offer programs with no money down, but these have become exceedingly rare since the credit crisis in 2008 and often require especially squeaky-clean credit. It is usually best to consider the maximum amount you would be comfortable putting down, and set your budget based on that amount. You can always adjust downward if the situation warrants.
Possible credit considerations are Bankruptcy, Slow Pay and Repos. These issues may have an impact on your ability to finance. Check with a qualified RV finance manager for assistance.
How Do You Know How Much Per Month You Can Afford?
One of the best ways to set a budget when financing is to complete an RV financing worksheet. This sheet will help you look at your financial position in a way similar to a RV financing institution. Take the time to complete the worksheet to determine what your specific financial situation suggests you can reasonably invest per month.
RV Loans typically offer longer terms than cars for example. This is in part due to the longer life cycle of an RV. It is not uncommon for terms to exceed 10, 12, or even 15 or 20 years. Many people do not keep their RV for the full term and end up with a payoff due when it is time to trade or liquidate. Failing to put enough down can lead to out of equity situations where the owner owes more than the current market value. This can make trading or selling difficult without added principle payments. It is usually best to put down as much as you are comfortable and to finance for the shortest term you are comfortable. If not, be prepared to add cash to improve your equity situation when you want to trade or sell. In many ways long-term RV loans are similar to a lease in that you are primarily financing your depreciation for the time you own the RV.
RV FINANCING WORKSHEET
Total Gross Income $__________ per month
Monthly Gross Income x (40%) =
Maximum Total Obligations Allowed (A) $__________(A) per month
Actual Total Present Obligations (B) $__________ (B) per month
(auto loans, rent/mortgage, credit cards, utilities)
Maximum Total Obligations Allowed (A) (A) $ _____________
Less Actual Total Present Obligations (B) -(B) $______________
Equals (C) Monthly Income Available to invest in an RV
(A-B) = (C) $__________ per month
Would you be comfortable with this amount?
If not, amount you would be comfortable with: $______________ per month
The RV financing worksheet will estimate how much the typical RV finance source will underwrite for you to purchase an RV. This is an estimate of your reasonable maximum monthly payment. This is typically the amount you will be able to qualify for. You may not be willing to invest this much each month, but it is the most many sources will lend you. From this number you can set your own monthly payment budget.
How do you know what fits your budget?
Using the following chart and a current interest rate you can determine your “amount to finance” budget in dollars. You can estimate a current interest rate by checking the real-estate section in your local newspaper and adding from 2% to 4% to the 30 year fixed rate mortgage rate typical for your area. Simply take the monthly payment you would be comfortable with and divide it by the factor from the Rate/Term Factor Chart (see below) for the current interest rate. Choose a term you would be comfortable with as well. It is usually helpful to figure a range of terms to get a feel for your “amount to finance” budget based on the different terms available. RV loans have terms available up to 180 months (15 years). In some cases, even up to 240 month (20 year) terms are available. Generally, the larger the amount financed, the longer the term available, and the better (lower) the available interest rate will be.
RATE/TERM FACTOR CHART
An even simpler way to approximate your amount to finance is to divide your monthly payment budget by one of the following payment estimates.
Typical payment estimates based on the maximum available terms:
Motorhomes: $9 per $1,000 financed (180 months)
Towables: $11 per $1,000 financed (144 months)
These figures will help you “ballpark” your monthly payments.
For example: If you’re interested in a motorhome and do not want your payment to exceed $400 per month, divide $400 by $9 (per $1,000) which equals $44,444. That is an estimate of your “amount to finance” budget.
Next, take your “amount to finance” budget and add the amount you will be comfortable putting down. The resulting figure is your total purchase price—including taxes, tags, title, and all other fees, which may be required. If you back out these taxes and fees, you have your budget for how much you can invest in a RV.
In the previous example: $44,444 plus $5,000 (down payment budget) equals $49,444. Back out the taxes, title, tags, & fees by subtracting $150 (estimate for all fees) and dividing the remainder by 1.06 (6% sales tax).
$49,444 minus $150 equals $49,294.
$49,294 divided by 1.06 equals $46,503.77.
RV purchase price budget is $46,503, or approximately $46,500.
MY RV PURCHASE BUDGET
Cash Purchase Amount ____________________________
Down Payment Amount ____________________________
Monthly Payment Amount ____________________________
Desired Term ____________________________
Reasonable Interest Rate ____________________________
Divide monthly payment by factor from the factor chart
(Or use the quick $9 or $11 per $1000 method).
This will give you your amount to finance budget.
Amount to Finance Budget ____________________________
+ Down Payment Budget +____________________________
= Total RV Purchase Budget =____________________________
– Taxes, title, tags, & fees –____________________________
= RV Purchase Price Budget =____________________________
The result is your RV purchase budget amount. This is the actual price you want to pay for your RV before taxes, title, tags, and other fees are added.