Buying a boat is a big decision and a long-term commitment for which there is a lot of information and advice to sift through. Let’s face it, unless you have the money to pay the full price of the boat all at once, you will need to consider boat financing. Don’t fret! Many people find that financing a boat is not much different than financing a car. Let’s take a quick dive into the specifics of boat loans.
Types of Loans & How They Work
Boat loans are installment loans that have a loan term, a fixed price, and a fixed or variable interest rate, upon which you make monthly payments. Each of these factors vary depending on the loan amount, the lender, your income and other particulars. For starters, the interest rate is a very important piece of the loan puzzle that should be scrutinized when shopping around for loans. Low interest rates are ideal and thus, very appealing. This is where lenders can get you, though. Ensure that you verify the loan terms are the same across the board for the loans you are considering, because some may require shorter loan terms or an age limit on the boat.
You should also pay attention to the type of loan you are being offered in case the interest rate is variable, meaning that the introductory interest rate looks nice, but it will increase over the life of the loan. A fixed-rate loan offers you consistency, keeping your interest rate, loan term and payment amount the same over time.
Secured & Unsecured Loans
Whether you are planning to buy a new or pre-owned boat, you should be aware of the difference between secured and unsecured boat loans. With a secured boat loan, the loan is secured by the boat you are purchasing, meaning that if you default on your loan, the boat can be taken by the lender. This loan type is often accompanied by a larger loan amount, a longer repayment term and a lower interest rate. A down payment is often required.
On the flip side, there are unsecured loans, which do not require collateral. Without that security, lenders may increase the rates and shorten the terms to protect themselves. Also, the damage falls to you and your credit score if you default on your loan.
Once a loan has been reviewed and appears satisfactory, a pre-approval application should be submitted. During this process, you will most likely have to submit a credit report or score, financial statements and possibly your previous year’s tax return. There may be additional pieces such as your income and housing situation that will be required but this process won’t be as tedious as the next step. This is a relatively quick process that upon pre-approval, will give you a pre-approval letter, which lets lenders and boat dealerships know you are the real deal.
If all goes well, you will then begin the approval process. Do not go into this step without being prepared! Gather any and all details you think lenders will need; financial statements; employment information; proof of intent to obtain boater’s insurance (lenders and dealerships will require an insurance policy prior to the boat leaving the lot); information about the boat you are interested in, including the price, the type of boat and its age. For self-employed individuals and business owners, you may also be asked to provide business tax returns. During this stage, there will probably be a hard credit inquiry against your profile. Depending on the lender you are working with, you could receive your approval answer within the same day or up to a few business days later.
Don’t forget, there is a chance you will also need a down payment. As with purchasing a car, you can use your current boat as a trade in toward that down payment, and the more you put down, the better your chances at receiving a lower interest rate. Always review the fine print about the down payment. Is it refundable if financing falls through or you change your mind about the purchase? Be sure to get a receipt and documentation on the terms.
Purchasing a Pre-Owned Boat
The process for financing a pre-owned boat is not much different from that of a new boat, less a few important details. In addition to the steps mentioned above, you will work with a Boat Loan Specialist or other professional to get a marine survey completed to appraise the value of the boat, as well as a title examination to check for any liens against it. Boats less than 15 years old are your best bet; anything older and financing may not come easy, if at all. For more information, check out our Ultimate Guide to Buying a Preowned Boat.
Typical Boat Loan Terms
Despite the similarities, it is important to note that getting a boat loan differs from an auto loan in some key ways, specifically in relation to pricing and promotions. Auto manufacturers often have rebates and subsidies they can offer lenders, and dealerships can often offer competitive rates. Neither of these instances may be true with boat manufacturers or dealers, given the lower volume of boat sales compared to cars. In some cases, a Boat Loan Specialist may be able to recommend lower down payment programs. You will probably also be looking at larger loan amounts and longer payment terms for boats as opposed to cars.
The terms of your boat loan will depend upon several factors, such as your credit score, your debt-to-income ratio and your liquidity. These terms may also differ slightly from lender to lender. Depending upon your situation and the loan amount, your payment term can range from 2 to 20 years, with longer terms resulting in lower payments but more interest paid over the life of the loan. Secured loans offer lengthier repayment terms than unsecured loans. As for how much you will pay each month, that very much depends upon the culmination of all the information you provided during approval and all the variables discussed in this section.
Annual Percentage Rates (APR) are anywhere from 5% to 36%, although rates are pretty low right now. Down payments can range from 0-20% of the total cost of the boat but are often somewhere between 10-20%. The amount required will also depend upon the type and age of the boat. If you want to adjust any of these terms, consider offering up a larger down payment or agreeing to a shorter or longer repayment term limit.
To qualify for a boat loan, there are some basic requirements you will need to meet. Let’s begin with your credit. A score of 700 or higher will get you in the door, no problem. A score in the upper-600s could also get you reasonable finance terms, with a possible interest rate hike. Anything below the high 600s will probably make things difficult, and just like in the case of other loans, if you have credit issues such as bankruptcy or foreclosure, you most likely will not meet the financing requirements. Along with your credit rating, lenders will evaluate your debt-to-income ratio. This is the percentage of your monthly gross income that is spent on debt payments. The higher this ratio, the riskier you appear.
Your net worth and income are other factors that need to be verified. They need to determine if you are already overextended with other loans and if your income and employment are stable. You will also have to provide information regarding proof of stable housing, as well as a list of your assets and liabilities. Lenders will evaluate your liquidity. This is an important aspect of the requirement process because lenders like to see that you have enough cash to support yourself for a certain amount of time if your income were to change.
What to Consider before Deciding to Finance Your Boat
Perhaps the most important point to address before considering buying a boat is your budget. Boats will cost you beyond just the initial price and the financing structure; you will have to invest in it constantly. Boat ownership comes with many expenses, such as registration, maintenance, fuel, storage, insurance, licenses, winterizing, transportation, taxes, slip fees and more, which could easily double your monthly boat costs. So, before you approach the finance market, asses your budget and figure out the magic number that works for you; the number you cannot exceed each month. Also factor in the amount you will have to save towards a down payment. This way, when you meet with lenders and they try to offer you an amount beyond what works for your monthly budget, you can clearly state your reality and pick a boat that meets all your needs. While you’re at it, check your credit score beforehand. This will give you a better idea of what you’re getting into when applying for loans.
Prior to taking this journey, you will want to do your research on laws regarding requirements for operating boats. This will ensure that as soon your purchase is final, you can take that beautiful boat out for a spin. In fact, lenders will even take your experience into consideration when considering you for a loan. You will also want to figure out where you plan on storing your boat because that question will probably come up.
There is also a neat little tax break you should be aware of. Pursuant to Internal Revenue Code section 163(h)(2), “a taxpayer may deduce qualified interest on a qualified residence”. Your boat may qualify for this tax break if it includes a cooking space, a sleeping place and a toilet. Ask your lender about this tax deduction when discussing your options.
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The Roads to Financing a Boat
Now that you know the basics (and then some), let’s prepare you for choosing your lender. If you are considering choosing a loan simply because it has the lowest rate around, be cautious. These lower rates may come with conditions or may be variable throughout the life of the loan. You have options when it comes to the type of lender you use. Do some shopping. Gather several loans from different types of vendors, compare their offers and don’t forget to read all the fine print. No matter which route you choose, keep in mind that processing a boat loan for a new boat can take up to a week, and a bit longer for used boats.
Finance Through Your Boat Dealer
Boat dealers have a lot of experience when it comes to putting together a boat loan, making them masters of efficiency. This could be a good starting point as they will be able to answer any questions you have and offer suggestions for insurance and other details you will want to consider. If there are any promotions or discounts to be had, you can be sure your dealer will know about them. Most established dealerships often partner with a trusted marine specific finance company. Our Ingman Marine Dealerships partner with Marker 5; contact us to learn more or fill out our finance form now!
Get a Loan From Your Bank or Credit Union
Some buyers choose to finance a boat with a bank loan. Keep in mind, banks will scrutinize your situation more so than other lenders, but you are likely to qualify for a secured loan if you meet all the requirements. As an added bonus, banks have the authority to offers incentives to existing customers that may be worth your while.
An option some boat owners have taken advantage of through their bank is the utilization of a second mortgage or home equity loan. This route provides a lower interest rate, and it might also lead to some tax benefits. The downside of such a deal is that it can cause the process to become more complex, as it involves a lot of paperwork that can be time-consuming and includes closing costs. There is also the risk of offering your home as collateral.
Credit unions are known for offering lower interest rates and overlooking lower credit scores, making a secured loan through them very appealing. This would not be a bad place to start.
Use an Outside Marine Financing Agency
Last, but not least, there is the option of taking a loan out from a third-party lender that is specialized in boat loans. You will want to locate an agency that is a member of the National Marine Lenders Association. These agencies are pros at closing boat loans and have the reputation for offering loans with ideal terms, such as lower monthly payments and down payments, quicker turnaround on approval decisions and longer repayment terms.
Boat financing is not that hard if it’s done right. There is also no one-size-fits-all type of answer when it comes to loan terms, but these considerations can give you an idea of what to expect. If owning a boat has always been your dream, you can certainly make it happen by heeding our advice. Shop around and find the terms that meet your situation. Scrutinize all the terms before accepting an offer. If you’re not finding your ideal loan, take some time to work on your credit or your debt-to-income ratio or simply to save up a larger down payment. You dream boat will be here waiting for you.