Can You Afford a Motorcycle Loan?

Help for bad credit applicants.

Can You Afford a Motorcycle Loan?

Randy’s opinions in the video are completely his own, and not necessarily the opinions of the owners and/or the producers of WFL. His commentary is NOT intended to be financial advice. You should seek professional advice from an expert in your area before making any financial decisions.

Can you afford to buy that motorcycle? I know that bike looks amazing; shiny and powerful, just waiting for you to kick into it and hit the road. But can you actually afford the payments?

Welcome to our first episode of our new “Can You Afford It?” video series; hosted by our own Randy Darling. In this episode Randy goes through the process of finding out whether or not Andrew can afford a new bike on credit. He goes through the steps of calculating Andrew’s monthly income, his monthly debt payments, at the same time taking into account his credit score. Please leave your comments below, and share this if you get a moment.

 

 

Video Transcription

Hello, my name is Randy and welcome to WeFindLenders.com. This is a new episode idea we’re doing and it’s based on people who have asked for specific loans to purchase different things. This one is about someone who wanted to buy a motorcycle and they wanted to borrow
$50,000.

I’m not sure how much he had for a down-payment, or how much he had saved, or how much his bike cost; but wanted $50,000 to be borrowed.

So anyways we have a nice little picture of a motorcycle (Harley Davidson). You can see why someone would want to buy one – they’re
pretty good-looking right – anyways so let’s get on with the actual loan.

Motorcycle Loan Calculations

What we do to figure this out – to try and give a good answer on how much of a loan you can afford – the best thing we can do is take a look at a DTI calculator also known as a debt to income ratio calculator. We have a link here for me already and that takes us to this calculator.

A shout-out goes to a company called GoodCalculators.com for their debt-to-income (calculator).

So let’s try their debt-to-income ratio calculator and see if you can afford to borrow $50,000. You scroll down a little bit here they have
a lot of information about their loan calculators. And we have a place where we can enter some of the particulars in this case. Andrew lives in Ohio. If you’re wondering where we get this information from – it’s from a lot of loan websites we’ve had over the years since 2003 where people have written in or made comments requesting loans.

This is just an example from a borrower a long time ago but it still works now. So let’s move on. 

Gross Monthly Income

So gross monthly income – in this case we went with; some of it’s been prefilled out but anyways – five thousand dollars is the gross monthly income am i thinking I have a list of the basic items here. Let’s see – yeah, here we go, monthly income before tax was $5000 and let’s see then we have partner’s income before taxes zero, child support alimony zero, extra income is $1200.

So let’s go back to the calculator and put zero for that and other income 1200 dollars. Okay, so that’s it pretty well for monthly income and now we can take a look at mortgage and rent.

Gross Monthly Payments

What you have in this case is rent for eleven hundred dollars total(and let’s take a look here) property tax is zero, obviously it’s a rental. Condo and HOA fees zero, home insurance zero.

Vehicle loan $650, so let’s put that in our calculator. Car loan six hundred and fifty dollars. I believe there was zero for a personal loan – let’s scroll down a bit. Student loans no, credit card minimum payment seventy-five dollars. Then alimony / child support zero, and other debt was zero.

Calculating DTI Percentage

So now we can calculate this and you see the update of the numbers down below coming in with a debt-to-income ratio of 29.44%. They explain actually on GoodCalculators.com the back-end debt-to-income ratio of twenty nine point four four percent. 

Credit risk level is moderate on the back end. Front-end debt to income ratio is seventeen point seven four percent. Credit risk level is considered low, total monthly income $6,200, total monthly debts $1825. And then we have a nice little pie chart here with an income breakdown, household debts, other debts, and remaining (monies).

So you know all information in this looks like a healthy debt-to-income ratio and some ways somebody could get a loan no problem – they should shouldn’t have an issue with this right…but we have to take into consideration credit score.

Credit Score Considerations

So let’s go back and take a look. I think I’ve got this information already entered here so we give a good example. The credit score was 640 so you know he wants to borrow $50,000 to buy this motorcycle. 

The debt-to-income is 29.44% – we always want to see someone’s debt to income ratio below thirty five percent – that’s a really good round safe number to go by, and we have a little bit information about DTI here.

Expert Opinion on DTI

Below we have another expert’s comments by Emilia Josephson and she’s a financial writer. She’s been on AOL CBS News, and The Simple Dollar. And she has a degree from Columbia and a degree from Oxford.

Anyways, she explains about what a healthy DTI is over here if you click on this post. It explains all about what is a good debt to income ratio. Recommended reading I would say, you know…explains everything you need to know and what numbers to look for and like I said she comes to the conclusion of 36%.

Randy’s Recommendation

So we use 35% as a good safe place to be, but like I say, back to credit rating. So with a credit score of 640 it’s pretty risky because the interest rate you would probably get on a loan with that credit score is gonna be quite high. That’s really gonna affect his debt to income ratio. 

Of course a lot of people would take the risk and do it with these numbers, and a bank would probably approve him – but my recommendation would be, “unless you really need that motorcycle – you know, if it’s something you need to get to work with that’s completely different and maybe it’s a necessity.” But if it’s just for pleasure and it’s, just for fun, I would suggest holding off on that and maybe wait till his credit
score’s improved quite a bit and get a better rate.

Maybe work on saving up a lot of money beforehand so you have a nice down payment if he can hold off that would be definitely my recommendation. I hope this has been helpful. It’s always a good idea to use a DTI calculator before considering any kind of a loan. Thank you, and farewell from WeFindLenders.com.

END TRANSCRIPTION

More On 35% DTI Threshold

Please note that your DTI (Debt to Income Ratio) should never be greater than 36% (Randy uses 35%) when considering taking on more credit. Here is a good post on DTI to read by from Amelia Josephson. See: “What Is a Good Debt-To-Income Ratio”

Generally the answer is: a ratio at or below 36%. The 36% Rule states that your DTI should never pass 36%. A DTI of 36% gives you more wiggle room than a DTI of 43% — Amelia Josephson is a financial writer who has appeared on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford.

Calculator used: DTI (Debt to Income Ratio) from Good Calculators

Whiteboard Notes:

Loan Purpose: Andrew wants to borrow approx. $50,000 to buy a motorcycle

Debt-To-Income Ratio: 29.44% which is good (should be below 35%)

Randy’s opinion: Andrew’s credit score is below 640 so not a good idea to take on any more credit until his credit score has improved.

Monthly Income:

Gross Mo. Income: $5000
Partner’s Gross In: $0
Child Support/Alimony: $0
Extra Mo. Income: $1200

Monthly Payments:

Mortgage/Rent: $1100
Property Tax: $0
HOA Fees: $0
Home Insurance: $0
Vehicle Loan: $650
Personal Loans: $0
Student Loans: $0
CC Minimum Payment: $75
Child Support/Alimony: $0
Extra Debt(s): $0

So this wraps up our first edition of “Can You Afford It”, where we try to shed light on the reality of monthly income vs monthly outgoing. Too often as consumers we make big purchases based on emotion, and those decisions can come with big consequences.

I would like to close a couple of expert comments on the subject of loan affordability:

Expert #1:

Trent Hamm - Simple Dollar Expert Trent Hamm

This first expert quote is from Trent Hamm over at the Simple Dollar. His advice is in regards to a mortgage, but the same discipline is employed as our example above on the idea of a motorcycle loan.

“Regardless of the situation, though, I give these people the same advice. Your total debt payment for a given month should not exceed 30% of your take-home pay.

In other words, if you bring home $4,000 per month, your total debt payments for that month — including student loans, car payments, credit card bills, and your potential mortgage itself — shouldn’t exceed $1,200.”

Read the rest of Trent’s post here. Take special note of his 30% DTI threshold, as compared to others who use 43% as a safe number. I encourage my friends and family members to use a 35% threshold.

Expert #2:

 Philip Reed

Our second expert quote comes from Philip Reed over at NerdWallet. In his article he specifically talks about whether or a not a person can afford a car payment. This is a perfect subject in regards to “emotional buying”. I know I get really excited about buying a new vehicle and I would guess we all are when it comes right down to it. Here is his quote:

“Before we get down to brass tacks, we should explain that many financial experts recommend that total car expenses — your monthly payment, plus insurance, gas and maintenance — be less than 15% to 20% of your take-home pay.

To avoid stretching your budget, it’s a good idea to spend less than 10% of your monthly take-home pay on your car loan payment.”

Read the rest of Philip’s post here. Take note of the ball-park percentage he uses of 10% (of total monthly take-home pay – net income). This seems like a safe and conservative percentage to use.

 

Content curated & Fact-Checked By Lance Somerset:
Lance Somerset holds a degree from the University of Illinois. His expertise is in the field of personal finance, and is a fact checker for various online outlets in the United States. He was raised in Chicago, and now resides in Rancho Mirage, CA. Visit Lance on Quora if you would like to ask him a question.

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