Finance without the crisis

Buying a bike is probably going to be one of the biggest financial decisions of your life and yet for most of us it's something that's ruled by the heart instead of the head.

While most of us spend months deciding what bike we'd like, finding the right one, haggling for the right price, scouring the market for the best insurance deals and even planning where to fill it with fuel to save a few extra pennies, when it comes to actually financing the purchase it's all too easy to jump at whatever deal is offered without looking at the alternatives.

While it's easy to spend hours poring over bike brochures and digesting every last specification, our minds go blank the moment legally binding finance documents are shoved before us, signing blindly without considering if there's a better way. Mention bhp and we're all ears, talk about HP and most of us start drifting.

But if you like money, or the things it can buy you, it's worth trying to focus for a few minutes and work out whether you could be saving hundreds by simply financing your next bike a different way.

Cash

In an ideal world buying a new bike would simply be a case of handing over a wad of notes, scribbling a cheque or swiping a card, and if you've recently won the lottery or you're a City banker with a bonus to squander then congratulations, you can stop reading now. But for most people the price of a new bike – or even a used one – is higher than the balance in our current accounts.

And actually, even if you can afford to buy outright, it's not necessarily the cheapest way to do it.

Usually, however, it is. Wads of notes can be enormously persuasive when it comes to getting a discount, and if it's coming straight from your personal fortune then there are no hidden costs; you pay the agreed price and that's it. No interest payments, no fees, no penalties.

But if you're still reading at this stage, the chances are that you'll be looking for some sort of finance when you next buy a bike. So if the cash isn't available, what else is?

Personal loans

In practice, provided nothing goes wrong, you won't notice much difference between hire purchase and a personal loan, but they actually work quite differently.

With a personal loan you'll be paying a fixed monthly sum over a period of time and paying interest, exactly as you do with HP. With a personal loan, the bike is yours from day one; the loan isn't linked intrinsically to the bike. You can sell it whenever you want, but of course you'll still be expected to pay back the loan whether the bike is in your possession or not.

Personal loans can be split into two types – secured and unsecured. Smaller amounts tend to be unsecured, which means there are specific assets named to be repossessed if you fail to pay. Larger loans tend to be secured, which means you guarantee them against the value of specific assets, normally your home. Fail to make repayments and those assets are at risk of being repossessed. For bikes, the majority of personal loans will be unsecured.

Dave Macey, franchise development manager for Black Horse Finance, the biggest player in the motorcycle finance field, explains: “With a personal loan there's just a straight deposit and monthly repayments up to four years. Customers agree the purchase price, pay the deposit to the dealer – anything from £99 upwards, but most people put in a lot more than that because they have part exchanges – and pay the rest in instalments. It's traditional finance, and with it you can include new leathers, a new helmet, everything you need for a ride-away package.

“Although it's an unsecured loan we have a responsibility to make sure we're lending against the value of the bike, so if a bike's worth eight grand, we're not going to lend 20 grand as it's being lent predominantly for the bike, but we can include an element for leathers, helmets, gloves, accessories with a personal loan.”

Hire purchase

Hire purchase is one of the longest established ways to spread payments. You put down a deposit and then pay fixed monthly instalments over a fixed period until the value of the bike and interest at whatever rate was originally agreed is paid off. Unlike loans, with HP you don't actually own the bike until the last payment has been made; it can be repossessed if you stop paying, and you can't sell it until the finance is settled and the bike is actually yours to sell. The level of deposit, the size of the repayments and the amount of interest can vary enormously depending on the deals you can find and the length of the HP period, usually between three and five years.

Macey says: “Hire purchase is exactly the same as a personal loan agreement except the finance is secured on the bike. So for hire purchase the customer will own the bike outright at the end of the hire-purchase agreement when they settle the finance. We don't include the leathers, helmets, gloves etc on this one.

“Hire purchase is also a traditional finance product, and again we offer deposits from £99 and payment periods of up to 48 months. Most finance now is done on hire purchase, with personal loans only used when accessories are needed.

“The customer can settle at any time, and the bike becomes theirs. If they decide to sell the bike privately before the end of the hire-purchase period they will need to settle the finance first, or if they part-exchange the dealer will contra-settle the agreement and they can either pay cash for a new bike or re-finance for the new bike. But it's all clearly explained to the customers before they sign an agreement.

“They can't sell it and not repay us, because the bike isn't technically theirs to sell until the hire-purchase is settled. But the dealer will clearly explain it all so customers don't walk away with any misconceptions.”

PCP

Personal contract purchase, or PCP, is a bit more complicated but is one of the most popular ways to buy new bikes.

PCP is attractive because it makes monthly payment far lower than traditional loans or HP agreements simply because they're not covering the whole cost of the bike. PCP requires a deposit – often covered by a trade-in bike – followed by small monthly payments over a two or three year period. Great! But at the end there's another large payment, called the “guaranteed future value” (GFV), to pay. That final payment is based on an estimate of the expected secondhand value of the bike at the end of the deal, and the idea is that it gives you several options when you reach the end of the PCP deal. First, you can pay up – perhaps you've saved the cash to do so, or if not you might have to get a personal loan to do it. Second, you can hand the bike back and walk away. Third, you can trade it in and use any surplus value over and above the GFV as the deposit or part of the deposit for another PCP deal or HP agreement.

Because the bike is expected to be worth a specific amount at the end of the deal, PCP does add a few extra hurdles. First, there's always a mileage limit, with a penalty to pay if you go over it (usually around 5p per mile), and there may also be penalties if you fail to follow the service schedule.

Macey explains: “Again this is a hire-purchase agreement, but this product has really taken off in the motorcycle world over the last three years. The monthly repayments are less than with standard hire purchase or a personal loan because of the guaranteed future value. Basically that means we will guarantee a certain amount of the value of the bike. The customer has three choices. They can hand the bike back, subject to terms and conditions such as fair wear and tear, mileage etc, and walk away. Alternatively they can settle the finance and take ownership, or they can part exchange.

“We always set the guaranteed future value at a level where the customer will have some security if they part exchange. The majority of customers will part exchange.

“A lot of customers are taking this option: the monthly payments are a lot less than standard hire-purchase and they come back every two or three years to have a new bike for similar monthly repayments, maybe with a small extra deposit contribution.

“We set the GFV at a point where the customer has equity, so if we set a GFV of say, £4000, the bike might actually be worth £5200, or £6k, so the customer is likely to have £1200 or £2000 of deposit for their next bike. Of course, that's subject to the bike not being a wreck and sticking within the mileage parameters.”

Although handing the bike back at the end of the PCP deal is an option, it doesn't tend to make much sense. Since the GFV is likely to be well under the actual secondhand value of the bike, you're usually better off either trading in for a new bike and using the surplus against its cost or, even if you don't want to keep the bike, paying the GFV and then selling it privately to release the equity.

Credit cards

OK, so you're probably not going to put a £12k superbike on your American Express but at the cheaper end of the market something as simple as a credit card can be enough to get a good deal on finance.

With many cards offering an introductory zero per cent interest rate on spending for a year or more, they can provide a way to spread payments without having to fork out extra in the form of interest. Of course, the vital thing here is to know exactly when the zero per cent rate expires and be certain to have paid off the debt before it does, or you could face a much higher interest rate then you might have achieved with a loan.

Regardless of how you're financing a bike, it's worth putting at least £100 of the cost on a credit card, even if it's only part of the deposit. Section 75 of the Consumer Credit Act means that for anything between £100 and £30,000 paid with credit card, the card company is liable if something goes wrong. So if you need a refund and, for instance, the dealer you bought from has gone under, you'll be able to claim money back from the card company. And even if you only put £100 on your card, the card company's liability covers the entire cost of the goods. Debit cards don't offer the same protection, so even if you've no need of actual credit it's still worth using a credit card then paying it off immediately to ensure you don't rack up interest.

Buying a used bike

If you're buying privately on the used bike market your options when it comes to finance are much more limited. Since the more advanced finance deals like hire purchase and PCP are usually arranged via dealers, you're unlikely to be able to take advantage of them for a private sale.

Macey says: “If customers are going to go to BikeMart and try and finance a used bike from a private sale, we can't help as we operate through dealers. The options for private sales are more limited; high street personal loans, supermarket loans... Direct lenders, basically.”

While the best bike prices might be had by buying privately, buying a used bike from a dealer will often open up a wider scope of finance options.

“We finance used bikes up to 10 years old,” says Macey, “although it tends not to be on bikes more than six or seven years old. PCP is also available on used motorcycles up to three years old, although not for scooters. Because we can predict the value of the bikes, we can offer PCP on bikes up to that age. Normal hire purchase and personal loans are also available at dealers for used bikes, just as on new ones.”

Negotiating a deal

When you're haggling for a bike – new or used – from a dealer then the finance you're taking can be a significant point.

Traditional thinking suggests that buying with cash will open up the best scope for discounts, although that's not always the case as some dealers will actually benefit from selling you a finance package.

One thing that is more certain is that some of the more attractive finance packages – like the zero per cent APR deals often promoted by manufacturers – will work against the chances of getting a big discount on the purchase price. Usually, those deals, while attractive as they spread payments without accruing interest, mean you won't be able to knock much, if anything, off the bike's RRP.

That doesn't mean you can't have a bargain, though, as dealers will occasionally “over-allow” on part exchanges, so the paperwork shows you've paid the new bike's full RRP to get the zero per cent finance deal, but the dealer has valued your part exchange on the high side to effectively increase your deposit. While your own haggling skills will have an effect, the real deciders here tend to be market forces – as logic suggests, if you're buying an unpopular model that the dealer is worried he won't shift, you'll get a better bargain than if you're buying the latest must-have machine.

One thing you will struggle to do is to improve your chances of getting finance. Making sure you pay loans without a hitch will give a better credit history in the long run, but there's little that can be done instantly to improve a credit rating. “Each case is underwritten on its own merits,” says Macey, “There's a process that dealers go through and every customer is scored on their own circumstances – where they work, where they bank, where they live, their personal circumstances – it all goes through the normal credit score criteria. But there's nothing that you can really do to put yourself in a more advantageous position before buying a bike.”

What is APR?

You won't go far into investigating finance without bumping into the term 'APR' – or Annual Percentage Rate.

The best way to look at it is as a comparative tool – the lower the APR, the less interest you're paying each year. As the term suggests, it's worked out on the basis of how much interest you're paying on the loan each year, so don't be fooled into thinking that if you borrow £100 at 15 per cent APR, the total to repay will be £115. The total amount of interest will vary hugely depending on the length of the loan period. At the same APR, the total interest will be less if the loan is over a shorter period of time. So while your mortgage might be at a very low APR, say three per cent, because it's being paid over perhaps 25 years, the total amount of interest will be enormous. In stark contrast, the much-advertised “payday loans” designed to tide you over for a few days and be repaid almost immediately might have fees and interest of only a few pounds, but the APR of such loans can be as much as 4000 per cent – they're just not designed to be used for long periods of time.

APR itself is a manufactured idea. In reality, the amount of interest you're paying on the debt alters with each payment the same as the debt itself decreases over the period of the loan.

While helpful when comparing two finance deals that are going to be repaid over the same period, it's important to find out what the total that you'll actually end up paying will be.

Just to add a little confusion, you'll notice that adverts tend to refer to “representative APR” rather than simply “APR”. Macey says: “Representative APR is a calculation of all the interest and all the elements of a finance agreement, the advance, the fees, the period, all taken into account to reach an APR that can be used for comparative purposes to compare his deal against others on the market. It's a customer guide, but it's based on a lot of factors.”

Importantly, just because a deal might be advertised with five per cent “representative APR” that doesn't guarantee that you will be offered a five per cent APR deal. Macey says: “What you see advertised as 'representative' isn't necessarily what you will get, but it must be what 51 per cent of customers would get. You could get a better or worse rate, depending on your situation.”

Looking at the total to be repaid is vital, as it can make a difference to the deal you decide to do. For instance, while a low finance rate can be attractive, if it's only being offered should you pay the full list price of the bike then you may be better off haggling for more money off, even if it means accepting a higher APR.

As an example, if you had to pay £10,000 for a bike at zero per cent APR over 36 months, but for a cash deal you could get the bike for £9000, you'd actually save money if you could get a £9000 loan at five per cent APR over 36 months (the total to repay would be £9710.57, a saving of £289.43 compared to the £10,000, zero per cent finance deal).

Ben Purvis