When it comes to financing a new RV, many people may think of it as a similar process to obtaining an auto loan. However, there are significant differences between RV loans and car loans that can impact your financial planning and overall costs. In this post, we will explore key distinctions such as how the units are used, the varying loan terms available, how depreciation of RVs impacts the loan, and how interest rates differ between the two types of loans. By understanding these differences, you can set your expectations and make informed decisions when it comes to financing your next RV purchase.
Difference in Use & How It Effects Your Loan
One of the keys to understanding the reason why an automobile loan differs from a RV loan comes in considering how each of them are used. Your daily use vehicle is a necessity to get you to and from work and beyond. Lenders in Canada recognize that this means you are more likely to ensure that your daily driver is in reasonable shape and that you're not putting it at risk by missing payments.
Because of this primary use, car loans typically have higher approval rates and lower interest rates. On the other hand, an RV loan is used to finance a recreational vehicle that is primarily used for leisure activities such as camping, road trips, and vacations. Lenders consider this type of loan as more of a luxury or discretionary purchase, which means that the approval rates may be lower and interest rates may be higher compared to traditional car loans.
Lets look at some bulletpoints comparisons of how we use motor vehicles versus recreational vehicles and note how the risk is greater when it comes to your RV:
Typical Uses for a Daily Use Vehicle:
- Commuting to work or school
- Running errands such as grocery shopping or going to the gym
- Transporting children to school or activities
- Traveling short distances within the city or town
Typical Uses for an RV:
- Long-distance travel across multiple states or countries
- Camping in remote or off-grid locations with limited access to services
- Driving on unfamiliar or challenging terrain such as mountains or deserts
- Storing valuable personal belongings or equipment while traveling
With these points in mind, you can see how a RV loan carries higher risk. But how does that impact your loan? Great question! Next, we compare loan caps and durations of RV loans and auto loans to further understand the differences between the two types of financing.
Comparing Loan Sources
Canada has a plethora of loan options for both automotive and recreation. Depending on your credit, the best financing terms usually come directly from major banks and credit unions. Let's have a look at the various sources and how they may different when comparing automotive and RV loans.
- Major Banks & Credit Unions: Typically have the best interest rates in Canada and offer automotive financing both direct at branch and through dealership financing. For RV loans, however, many banks are strict in offerings, opting to push for unsecured loans such as personal loans or credit lines. Still, it is the best option to explore from the onset.
- Dealership Financing: While many dealerships, both in auto and recreational, have access to major banks for financing; they also typically use a lending network to ensure RV financing options to cover a wide range of credit history. Again, those with less than stellar credit will likely be steered towards private lenders with higher interest rates.
- Online Lenders: As the digital age continues to develop, a number of reputable online lenders have emerged. Some of these are standalone, offering affordable loan options directly to shoppers, and others are tied to brick-and-mortar dealerships while still processing online. Those with credit issues may feel more comfortable dealing with online lenders as they can provide the required documents remotely without dealing face-to-face.
Regardless of which route you choose, you can expect the loan application process to be similar and the final loan interest rates to match your credit history.
Differences in Loan Amount and Duration
When it comes to loan amounts, car loans and RV loans can differ significantly. Car loans are typically smaller in amount with the average automobile loan in Canada landing in the range around $20,000.
On the other hand, recreational vehicles typically carry a higher price tag and, as such, come with larger loan caps. While you can find RVs from $10,000 for a small camper trailer, it is not uncommon to be shelling out well over $100,000 for a luxury motorhome.
In terms of loan duration, car loans typically have shorter terms compared to RV loans. Car loans often range from three to seven years, with some lenders even offering longer terms up to ten years for luxury vehicles. The shorter loan terms for cars reflect the fact that they are depreciating assets and lenders want to minimize the risk of borrowers owing more on the loan than the vehicle is worth.
RV loans, on the other hand, can have longer loan durations. It is not uncommon to see RV loan terms ranging from ten to twenty years, especially for larger and more expensive RVs. The extended loan durations for RVs are justified by the fact that RVs typically retain their value better than cars over time, especially if they are well-maintained. These extended terms are crucial to keeping your monthly payment manageable.
While you may find unsecured automobile loans from major banks or credit unions, RV lenders often offset the risk in using the asset being financed as collateral. This offsets some of the risk associated with the longer loan term or buyers with less than perfect credit. Next we will touch on how secured RV loans in Canada work.
Secured Loans & Deprecation: Auto vs Recreational
Secured loans play a crucial role in offsetting risk for lenders, allowing them to offer extended loan terms and cater to clients with less-than-perfect credit scores. This is especially common in the automotive and RV loan industry, where the vehicle itself acts as collateral for the loan. While it is standard practice to see secured loans for both auto and RV loans, unsecured RV loans are almost unheard of due to the higher risk involved for lenders without collateral. The availability of secured RV loans provides lenders with a level of protection, enabling them to offer more flexibility in terms of loan duration and credit requirements.
Another significant difference between car loans and RV loans is the depreciation factor. Cars tend to depreciate rapidly, losing value as soon as they are driven off the dealership lot. On the other hand, RVs typically retain their value for a longer period of time due to their specialized nature and lower mileage. This difference in depreciation can influence loan terms and interest rates.
Interest Rate Differences Between Auto & Recreational
While many believe that all loans are created equal, interest rates actually vary significantly between car loans and RV loans. Due to everything we have discussed above, you can expect your interest rate to be higher for an RV loan compared to a car loan. This difference increases based on your credit situation, with the interest rate seeing a significant jump for those with bad credit. Let's take a look at current interest rates in Canada at different credit scores:
Interest Rates for Top Credit (Over 750
Credit Score):
- Auto loans: Ranging on average from 4.9% to 6.9%
- RV loans: Ranging on average from 7.9% to 9.9%
- Difference: RV loan rates are higher by 2-4%
Interest Rates for Mid to Upper Tier Credit (600 to 750
Credit Score):
- Auto loans: Ranging on average from 6.9% to 9.9%
- RV loans: Ranging on average from 12.9% to 14.9%
- Difference: RV loan rates are higher by 5-6%
Interest Rates for
Bad Credit (<600 Credit Score)
- Auto loans: Ranging on average from 12.9% to 19.9%
- RV loans: Ranging on average from 19.9% to 29.9%
- Difference: RV loan rates are higher by 7-10%
As expected, the interest rates for RV loans are generally higher across all credit tiers compared to auto loans. You can also see there is a substantial increase in interest rate for those in poor credit situations.
We hope this article has shed some light on the disparities between car loans and RV loans. Whether you're looking to purchase a car or embark on an RV adventure, it's crucial to consider the unique aspects of each loan type. Happy financing and safe travels!
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