How is interest calculated?
As you are planning on taking out a considerable-sized loan that will only be second to your home in terms of the size of repayment, it is important to understand why you have to repay the amount be asked.
On top of your RV loan will be interest that will either fluctuate (on a variable loan) or remain fixed (on a fixed rate loan). This is how the lender makes money from the money you are borrowing.
Interest rates applied to your loan are calculated through a combination of Federal Reserve rates and your own personal credit history (which we explain in more detail below).
You should also be aware that any ‘advertised’ APR rate you see used to promote an RV loan is unlikely to be applied to you. These are usually the absolute very best loan rates the lender will be able to provide – but you generally need immaculate credit to stand any chance of being offered these types of figures.
How to calculate the total cost of financing an RV
To understand how interest is calculated on your loan, you can use the following example.
Imagine you request to borrow $25,000 (known as the principal) at a fixed annual rate of 5% for a 10-year period. The calculation would be broken down as follows:
As you continue to pay off the principal loan each month, the same formula can be applied to the remaining amount, deducting the interest from the fixed repayment amount and taking this away from the principal total. Apply this on an ongoing basis to see what the interest will be for each month.
Depending on the duration of the loan, you will not pay equal amounts of principal and interest each month. RV loans are paid down via amortization, which means more interest is paid at the start of the contract than at the end. That is because the interest rate is being applied to the full principal amount at the beginning, and as this figure reduces, so will the interest rate payment.
How does your credit score affect your RV loan payments?
Your credit score will play a big role in deciding the amount of interest you will pay on your loan. It will also dictate how much money you will be able to borrow, as lenders will want to ensure the money they lend is repayable in full.
When it comes to applying for an RV loan the lender will usually go through two stages – pre-qualification and a qualification check. This involves two types of credit check – one that is ‘soft’ and a more thorough check that is ‘hard’.
A ‘soft’ credit check is used in the first instance by lenders to see if you are a suitable fit for a loan. This information is not kept on your credit file and will not have any impact at all on your credit rating. It will give you an idea of the amount of money you can borrow and the type of deal that can be offered to you.
If you wish to proceed and make a full application for an RV loan, this ‘hard’ check is more thorough and will leave a footprint on your credit file. Even if your application is not successful, it will be recorded and can have a negative effect on your score if the lender does not approve the loan.
Generally, if you have a good credit score you will benefit from a lower rate of interest being applied to the principal loan amount. Anyone with poor to average credit may be given a higher rate of interest, as the lender may have more concerns about your ability to repay the loan in full without defaulting.