Boat financing has many similarities to other types of loans, but there are some distinct characteristics when getting a boat loan. The basic premise is similar in that there typically involves a down payment that represents a portion of the purchase price, and the remaining portion of the purchase being paid over time (and you pay interest on this portion). The bank or lender that is providing you with the money makes money on the interest as you pay down the loan over time.
You can get boat financing through banks and credit unions, or like auto dealers and loans, many boat dealers themselves will have internal personnel to provide boat financing to you at the time of purchase. While it can sometimes be a more simple and seamless process to get the financing through the dealer you’re buying the boat from, you can occasionally get better terms by shopping the loan through various financial institutions.
Basics of loans
Before we get further into boat financing, let’s cover the basics of borrowing money to establish a solid foundation for the subject. Loans typically have three components to them: the interest rate, the security component and the term of the loan.
Interest rates are essentially what the lender is charging you for the use of their money. Interest rates can be either fixed or variable/adjustable. If your rate is fixed, then it will not change for the entire term of the loan. If the rate is adjustable, then it can change over time usually depending on the overall market of interest rates. For instance, you might hear about something such as “prime plus 3.” This refers to the prime rate which is an open market interest rate that affects the economy, and in this instance, your interest rate is whatever prime rate currently is plus 3 percentage points.
The security of a loan refers to the collateral that is used to guarantee your loan. While some loans can be unsecured in that there is no security, when it comes to most loans for things such as cars, boats or homes, they are secured using collateral. This security gives the lender a way to recoup their money in the event that you default on the loan, or cannot pay the loan any longer. In the case of boat financing, the boat itself is typically the security of the loan.
The term of a loan is the duration or length of time that the borrower has to pay back the money. In financing, usually if there is a longer term, the interest rate will be higher since the lender needs to be compensated for the additional risk that comes with waiting longer to be repaid.
When you get an actual loan, usually it will come with a few specific pieces of information that essentially tell you everything you need to know about your financing. They are:
- Balance of loan: How much money you are borrowing
- Interest rate: The interest rate you are being charged by the lender for borrowing the money
- Term: The length of time of the loan
- Monthly payment: The monthly payment is how much money you must each money which typically involves both interest and a portion of the balance of the loan that you are paying down
Boat financing basics
For the most part, boat financing is similar to what we just outlined in the section on loan basics. Typically boat loans are fixed interest rate loans that are secured by the boat. Pretty simple.
If you’ve borrowed money for a car previously, the process is similar, however there are some differences with boat loans compared to auto loans. For example, you will often see auto brands and dealers marketing super lower interest rates or even 0% interest rate loans on new car purchases. You typically won’t see this from boat dealers, because unlike the boat industry, auto manufacturers often offer subsidies to auto dealers to enable them to offer these types of loan promotions. So, the interest rate you’ll usually see in boat financing is a more normalized, tied-to-market interest rate.
Additionally, lenders will sometimes look at boat loans with additional scrutiny compared to car loans. The rationale here is that boats are an even more discretionary purchase when compared to a car. Why does this matter? Well, if a borrower is in a pinch, the most discretionary item is typically going to get defaulted on first. If someone is in a real bind financially, they will likely do away with paying a boat loan before they stop paying a car loan (since they likely need the car, and only want the boat). As such, banks will be a bit more careful in lending money for a boat because they want to plan for this extra level of risk compared to the auto financing market.
Boat financing process
When you are planning to apply for a boat loan, there are some important things to consider even before you get into the specific boat financing process. You’ll want to ensure you have a firm grasp on the total cost of ownership of the boat. If you don’t know what owning and operating the boat is going to truly cost, you might not have a good feel for the type of monthly payment you can absorb without enduring too much financial stress. Total cost of ownership should include the monthly payment for financing, but also things like insurance, storage, operation costs such as fuel, registration, taxes and of course maintenance costs.
If you’re buying a used boat directly from another person, you might be required to get a marine survey so that the lender trusts the boat is in decent condition. If you’re buying from a dealer, typically this isn’t required as the vetting process is handled at the dealer level in many cases (although this could be worth asking about).
As you get into the specifics of boat financing, your approval will typically be dictated by your credit score, your debt-to-income ratio and your liquidity. Debt-to-income ratio refers to the percentage of your income each month that is going to pay existing debts. This ratio is a key risk indicator for a lender and if you already have a high debt-to-income ratio, it might be more difficult to get approved for a boat loan.
The borrower’s liquidity refers to the amount of cash (or assets that can be quickly turned into cash) that the borrower has in various accounts. A lot of liquidity gives a lender confidence that if your income is disrupted, you can still cover the debt servicing payments on the boat.
Not only do these factors determine boat financing approval, but they’ll also typically dictate the types of terms you get on the boat loan once you are approved. Additionally, the interest rate, for instance, can fluctuate based on the credit worthiness factors just mentioned, but also the size of the loan being required and the term of the loan. Down payment size can sometimes be a factor as well in improving or worsening the interest rate you are approved for.
The size of the loan can often also dictate the amount of paperwork needed during the boat financing process. Loans over six figures often can require documentation such as tax returns and proof of income as well as documentation regarding the assets of the borrower. If you’re borrowing less than $100,000, the amount of documentation might be less although this can vary depending on every situation.
Borrowers will usually need to put down a down payment on the boat loan between 10% and 20% of the boat purchase price. For small loans in the $25,000-$50,000 range, however, sometimes you can get by with smaller down payments or even no down payment. For larger purchases in the high six figures and up, typically 20% down payment would be required.
The term of a loan for a larger boat will usually be anywhere from 10 to 20 years in duration. Smaller boat loans are usually 10 years in duration or shorter. While a longer term can help space the payments out more over time and make the monthly payment more manageable, as in any loan, the borrower will pay more interest over time the longer the term of the loan is.
What else should you consider during the boat financing process? Well, lenders will almost always want to ensure that you have insurance on the boat. This will typically be required for loan approval. Insurance is required since lenders will want to know that their loan (and security of the loan) is protected against loss in the event of damage or loss. If you’re attempting to finance a larger boat or yacht, the lender might even look further into your experience in managing and navigating a boat of such a size. In some situations, they might not approve a loan unless an experienced captain is being used to drive the boat.
Understanding depreciation & why it matters in boat financing
Similar to buying cars, depreciation is a major factor in boat purchasing and ownership. When you purchase a new boat, you’ll receive many benefits such as a warranty, the latest amenities and technology and of course a boat that is in perfectly good condition. But you’ll also get hit with much depreciation. Buying a used boat might lead to less depreciation incurred during your ownership, but you might get hit with more maintenance and repairs since older boats will have more problems than newer boats.
Estimates on boat depreciation vary, but some studies show that bow riders and cabin cruisers will depreciate at least 30% during the first three years. After five years of ownership, depreciation can approach 50% of the purchase price.
Why does this matter in boat financing? Well, since many owners take on boat loans with long terms that can approach even 20 years in duration, it’s important to consider the value of the boat against the balance owed on the boat during different times through the lifespan of your ownership and loan payment schedule.
If your boat has depreciated 40% (and thus is worth about 60% of what you paid for it), yet you still owe about 70% of the purchase price on your boat loan, then you’re effectively “upside down” on the loan. Upside down refers to when you owe more on a loan than the asset you purchased is now worth.
Ending up in a situation a few years into ownership where you are significantly upside down on the boat might be a bad idea. If you end up in a financial pinch and need to sell your boat, but selling your boat requires you to pay additional cash to get out of the boat loan, that’s not an ideal situation. Do your own analysis on the particular boat you are purchasing to understand what kind of depreciation to expect and what the value of the boat will be at various points through your planned boat ownership. Talking to people in the industry especially people who work on boats, work at marinas or even other individuals who have owned boats for years can really help you get a feel for value of your boat in the coming years. This will help you make the best decisions during the boat financing process.