Boat Financing 101 - Boat Loans, Home Loans, and What to Consider When Financing a Boat
A recreational boat can easily be the most expensive non-home purchase most people consider. Given that most of us lack the ability to pay cash, financing is our only option for getting on the water with the vessel we desire. In this guide, we cover basic loan types used for buying boats, tax and other considerations based on the loan and boat type, and other important issues to consider including insurance, depreciation, and boating budget. This guide is by no means comprehensive, but should serve as a good starting point. The first step in successful boat buying is to determine a realistic budget and stick to it. This budget must include more than just the loan payment. Consider downpayment, boat storage costs, upkeep and repairs, insurance, gas, and anything else related to using your boat. Even a new boat under warranty will likely require non-covered service in the 1st year. Once this exercise is complete, you should have a good idea on what your allowable monthy finance cost will be. You also need to consider what you can reasonably expect to borrow. In today’s market, this tends to be more than is wise, but there may be cases where existing debt, income, or credit history limit your options. A check of your credit rating and score is a good idea - as this will also have a bearing on your loan options and interest rate. 2. Basic Loan Types With a budget in mind, you can now consider the basic loan types. We will cover each in general here before getting into specifics on each type.
Boat loans are very much like auto loans - except not nearly as generous in terms of rates and downpayments. Interest on a boat loan may be tax deductable under the “2nd Home” deduction if the boat includes cooking, sleeping, and bathroom facilities (ie at least a stove, bunk, and port-a-potti). Many of the newer small cuddies now include a stove for this very reason. Lenders will require you purchase and maintain full insurance on your boat - so be sure to consider this in your cost equation. For new boats, standard loan terms allow financing up to 85-90% of the total purchase price plus tax, registration, and extended warranties. For buyers with excellent credit (~730+) some banks will offer no-money down loans, but these can be very dangerous due to depreciation - which we’ll talk about later. With used boats, loan terms depend on the age and value of the boat. When shopping for a boat loan, there are 3 primary sources - dealers (who usually work through a marine broker), marine brokers, and traditional banks. For our last 2 boat purchases, we found a traditional bank was the best route for us. Many, if not most, brokers will charge some closing costs, especially with used boats while offering similar rates as our bank which had no closing costs. If your lending requirements are out of the ordinary, a broker may still be your best option if you don’t want to shop around yourself. Home Equity Loans Given the boom in home values and until recently low interest rates, home equity loans have grown more common as ways to finance recreational purchases. Interest on home equity loans is generally tax deductible which is attracive for boats which would not otherwise qualify. Rates are generally set by the “Loan-to-Value” (LTV) ratio which is simply the ammount you owe on your home divided by the total “value” which can be a bit fuzzy. Strictly speaking, the value is the present market value of your home - which can be hard to pin down. A home appraisal may be required, especially if you are requesting a high LTV loan or you claim significant appreciation over a short time period. The best rates are for LTV’s less than 75-80% and many banks will cap loans to around 80%. Home equity loans are more likely to require closing costs than boat loans. Costs seem to vary from bank-to-bank, but are generally a few hundred dollars and may include appraisal fees. Competition between lenders does lead to reduced closing costs or waived costs - especially if the loan is held for at least 3-5 years. When we shopped around in the spring of 2006, home equity rates were running about a 1/4 to 1/2 percent higher than boat loan rates. Line-of-Credit - Line-of-Credit (LOC) loans do not have a fixed term (at least at the start). They act a bit like a credit card in that you have a “limit” to borrow against, but only pay interest on the ammount borrowed at any given time. Under a LOC, you may be able to make interest-only payments in the early years. LOC’s are quite popular for lenders since the open-ended terms and interest-only payments yield bigger profits in the long run - as such most lenders offer no-closing cost options for new LOC’s. The LOC’s interest rate is normally variable and based on the prime lending rate - meaning that as rates rise, the banks also make more money. In the consumers favor, most LOC’s can be “converted” to a fixed loan at some future point - but this is small consolation if rates have risen significantly. Fixed Home Equity LoanThe fixed loan opperates like a traditional mortgage or boat loan. You get a fixed payment term and interest rate. Rates are often a bit (~1/2 point) higher than the LOC (remember you’ll likely still save vs the LOC in the long run) but will not change over the course of the loan. Considerations for Choosing a Loan Type As an example, we purchased our 2001 Regal at about 40% of MSRP against a new 2005 model and only 60% against the best-deal out-the-door cost of the 2005 cruiser. If there is any question about how long you’ll have the boat, make that 20% downpayment to give yourself some price flexibility. Number 3 is by far the least common reaction, with 1 & 2 quite common and often the combination of 1 & 2. In any case, a value boat with a reasonable loan term lets you “test the waters” while you shop for your next vessel. We’d stay away from a LOC loan, except for small ammounts which can be paid off quickly. While interest rates can fall, they are still low by historical standards and the odds are in the lender’s favor. A fixed term also protects against future sticker shock when the LOC’s interest-only payments stop. If you’re looking to buy an older “project” boat, home equity may be your only option if you can’t afford cash. Older boats can be great deals - just be sure to do your part in establishing value prior to the purchase. Try to anticipate major repair or restoration costs also. Have an out if you need to suddenly sell the boat. Your best position is to owe much less than it’s worth. Expect that most boats take time to sell (excepting jon boats it seems). As we discussed in the home equity section, home equity gives you the boat free-and-clear, but may put you in a more difficult position in an economic downturn (it really depends on your individual situaiton). Don’t deplete your cash reserves in the initial purchase as even new boats will require a lot of investment in upkeep and provisioning. Some claim as high as 5-15% of the purchase price to outfit a new boat with equipment. Finally, we suggest you carry full insurance. A minor accident can total a boat - leaving you with no boat and a big loan. We’ll discuss insurance in a different article, but watch for depreciation clauses which can drastically reduce your payout on older boats. If your boat is young (usually around 5 years or less), you can often get “agreed value” or even “replacement” coverage for a bit extra for added financial safety. Make sure your insurance terms match your boating environment (offshore limits, season limits, hurrican deductibles, …). Conclusion
If you’re still with us, we hope you’ve found this article informative. Boat buying can be a big step - but we’ve found the family experiences invaluable. Have something to add? - Please contribute using our comments link below.
1. Determine Your Budget
The Boat Loan
1. Want a bigger boat
2. Want a different boat more optimized for their boating style
3. Want out of boating due to cost, time commitments, or other reasons
Related Posts:
March 22nd, 2007 at 3:02 am
Here is a listing of the various terminology typiccally utilized by many boat lenders:
http://www.beaconboatloans.com/index.html?page=4_Boat_Loan_Help_Loan_Products