A boat is usually considered a luxury item, though some people live on their boats. This feeds the myth that it is more difficult to get a loan for a boat compared to a loan for something like a house remodel or to pay college tuition. The truth is a boat loan is normally no more difficult to obtain than other loans because you have collateral – the boat. Even so, there are various ways to pay for the boat that do not even require a loan or collateral is not necessary. The important point is that you should understand all your options before deciding how you will pay for your boat to ensure you make the best financial decision.
Once you know which boat you want, you can figure out how you want to pay for it. There are numerous ways to finance a boat. The first thing to understand is there are secured and unsecured loans. A secured loan means you give the financial institution collateral in exchange for money. The collateral is more than likely the boat, but you can also take out a loan and use other collateral. Boat loans are usually secured.
Cash – You can pay with cash on hand, like cash in a savings account or cash obtained in some other manner, like a credit card (if a smaller boat, of course), stock sale or personal loan.
Personal loan – A personal loan is money borrowed from a credit union, bank or online lender. It can be secured or unsecured, but most personal loans are unsecured (that is why they are called personal). You obtain cash without necessarily indicating how you will use the cash. A personal loan can have a fixed or variable rate, though most are fixed rate.
Fixed or variable rate loan – A fixed or variable rate boat loan obtained from a bank, credit union or dealer that is secured by the boat is one of the most common means of financing. A fixed interest rate loan is a loan that has an interest rate that stays the same during the life of the loan. A variable rate loan is a loan that has a fluctuating interest rate that changes based on the prime rate or an underlying index rate.
A variable rate loan payment will change as the interest rate changes. A fixed rate loan payment remains the same over the life of the loan. Note there is a balloon payment loan also which has lower payments during the life of the loan but requires a big payoff at the end of the loan term. This type of loan is not usually used for financing a boat.
Marine lending organizations – There are marine lenders that specialize in financing new and used boats of all types, including power boats and sail boats from small crafts to yachts and trawlers. There are numerous lenders offering personalized marine financing programs. The National Marine Lenders Association (NMLA) lists qualified boat lenders. This is a great way to find the best marine lenders because the businesses specialize in boat financing so are marine market experts.
Online lenders – One other option is to work with an online lender that works with different banks. You apply through the online lender, and a loan agent searches for the lowest interest rate at associate banks most likely to approve the boat loan. The entire application process is done online.
Using the boat as collateral means the lender can repossess the boat if you miss payments. According to the National Marine Lenders Association, valuing collateral is one of the most challenging aspects of deciding whether to approve a boat loan. Collateral includes:
- The boat
- Engine or motor
Other factors taken into consideration include the economic environment and how it effects boat values. A pre-owned boat is valued based on the age of the boat, the boat’s condition, equipment, options, whether it has been used in salt or fresh water, the geographic location and the selling seasons. The lender will begin with reviewing as much documentation as possible, like the original manufacturer’s invoice, pricing guides, bill of sale, boat owner trading websites, marine surveys and purchase agreements.
You are required to buy insurance when financing a boat to ensure the collateral is protected.
What Effects Loan Terms?
Boat loan terms include the amount loaned, the interest rate and the duration of the loan. Boat loans today spread payments over 10-20 years, depending on the size of the loan. There are a number of factors that go into determining loan terms.
Type of boat – The type of boat can influence financing, depending on the boat lender. Many lenders will only finance particular types of boats. For example, the lender may only finance standard or custom sailboats and power boats, pontoon boats and multi-hull boats but not high-performance boats and houseboats. Some lender limitations you may discover include the following:
- As mentioned, only finances particular types of boats like power boats and sailboats but not high-performance boats
- Requires minimum loan amount
- Requires minimum boat length
- Has a required personal status for customers, like military affiliation
- Requires down payment percent, i.e., 10 percent or 20 percent
- Has additional requirements for living aboard boats
Boat’s age – Some lenders require the boat to be newer than a designated number of years which is typically 15 years or newer. Unsecured personal loans are sometimes the best option for older boats or certain boat models.
Loan amount – A boat loan will include the value of the boat, engine or motor, trailer and accessories. It may also include boat insurance. Generally speaking, the higher the loan amount, the lower the interest rate and the longer the payoff period.
Interest rate – The interest rate on the loan is dependent on many factors. The benchmark is the prime rate or index rate, but a lender will consider other factors too, like collateral, loan amount, credit worthiness and so on. This is similar to auto loans. When you go to an auto dealership and buy a car, the financial department sends out loan underwriting requests to two or more lenders. The interest and other loan terms are different for each one, and you select the best deal. Otherwise, you get one offer. The number of loan offers you get depends on the source of lending you choose.
Down payment – The down payment required depends on your credit status, the amount of the loan and the payment goal that best fits your credit status. A boat lender wants the payment to keep your debt-to-income ratio within a desired range. Down payment requirements are usually 10-20 percent of the loan amount.
Trade-in allowance – If you are using your existing boat as a trade-in when buying from a dealer, the boat’s value may be used as part of the down payment.
Credit score – The higher your credit score, the better the interest rate and repayment terms of the loan. According to Discover Boating, most lenders look for a credit score that is 700 or higher, noting that a lower credit score may require a higher interest rate or larger down payment to accommodate the higher risk. Typically, the credit score must be at least 680.
Financial factors – A lender will analyze a number of financial factors to determine loan eligibility. Two of the most important ones are debt-to-income ratio and net worth. A financial institution will only approve a loan if it believes the boat payment does not create an undue financial burden and the risk of default is low. You will need to prove employment and income and produce financial statements supporting claims.
Getting the Best Deal
Getting the best boat loan deal possible takes some planning. Instead of going to the nearest bank or credit union or the nearest boat dealer or broker, consider various ways to find the boat of your dreams at the lowest cost.
Timing the purchase – Timing your purchase of a new or used boat can make a difference. If buying a new boat, a good time to buy is either right before the new boat models arrive or during the slowest time of year for sales in your geographic area. For areas where boating is year-round, it might be during holiday seasons like Christmas. For areas where boating is halted due to winter weather, you can shop for a boat during late fall and winter. During the off season, you are more likely to get a discount or other benefits like accessories added at no additional cost.
Boat shows – Boat shows are usually held in the winter or early spring. By roaming a boat show, you can check out different boat models, inquire about boat financing options and ask various boat sellers about their used boat inventory.
Through a broker if boat is more expensive – Some of the best boat deals for high-end boats are through a broker. The broker is knowledgeable about the different models and makes and can help you search for the boat you have in mind.
Shop for a Loan – For many boat buyers, marine lenders offer the best deals. However, banks, credit unions and online virtual lenders are good boat loan sources. It almost always pays to loan shop and not take the first offer just because the bank is in your area or you have had a savings account at the credit union for years.
Insurance shop – Since insurance costs may be included in the loan in many cases, you want to shop for boat insurance just like you shopped for vehicle insurance. Insurance may be included in your boat loan monthly payment.
Ask for ways to get a discount – Sometimes, you can get a discount by exploring various options with the seller. For example, if ordering a new boat, you may be able to get a discount because the seller does not have to store the boat on the show room floor. The manufacturer gives dealers credits when they buy boats for display (called a floor plan), so maybe you can get an equivalent credit instead. Other ways to get a discount include pre-paying for the boat before delivery or buying last year’s model.
There may also be ways to get an interest rate discount. For example, some banks and credit unions offer a rate discount for automatic monthly payments.
After the Sale and before Title Transfer
Titling the boat – First, not all boats require a title, depending on state laws. However, you can voluntarily have the boat titled in that case. A boat title is proof of ownership.
A registration is like a car registration. It is not a secure proof of ownership document. It just indicates the name of the boat’s owner, a registration number and some other information. The registration is a kind of a tax document because it proves you paid annual registration fees and have properly recorded the boat with the right state agency. The registration number is like a license plate and the numbers and letters are displayed on the hull.
Each state determines the kind of watercraft requiring registration.
When you buy a boat from a private seller and pay cash, you need to have the title transferred to your name and the boat registered in your name. A word of caution is to make sure the title is free and clear before paying the seller. Also make sure the Hull Identification Number (HIN) on the title is the same number on the boat. In some states, only boats of a certain length or value need titling. If the seller does not have a title, then ask for some other proof of ownership, like a bill of sale.
If you buy a boat with a loan and the boat is collateral, the bank or credit union will retain title until the loan is paid off. If you default on the loan, the lender can repossess the boat. You will register the boat in your name. Each state has different laws and regulations concerning boat titling and registration.
This is where buying a boat from a boat dealer or broker simplifies the process of meeting titling and registration requirements.
Insurance – A financial institution extending a collateralized loan will require insurance on the asset for its full value. If you buy a boat for cash from a private seller, you should still insure the boat.
Boat trailer titling – States have varying rules for trailer titling. In some states, all trailers need a title, while in other states only trailers longer than a certain number of feet need a title.
Documentation (national titling) - Vessels that weigh five net tons or more can be documented with the U.S. Coast Guard. This enables the boat to be recognized as a U.S. vessel when in foreign waters. A vessel weighing this much is about 25 feet or more in length. Find boat documentation professionals here.
It is easy to find a boat loan calculator online (e.g., calculator.net) that you can use to figure out the loan amount and interest rate you can afford on your budget. Use the amortized loan option which requires paying back a fixed amount monthly to get a good idea of the monthly payment amount, the total amount paid for principal and interest and the total interest paid over the life of the loan. This will get you started. Consider getting pre-approved for a loan amount, so you know exactly what you can afford when shopping for a boat. The important takeaway is that you can get the best loan terms by checking out various financial institutions.