While boat loans can differ from other forms of debt such as auto loans, the basic premise is similar. When financing a boat (or a car), there typically involves a down payment representing a partial amount of the purchase with the rest of the purchase price being borrowed. The purchaser then pays interest over a fixed term as the amount of borrowed money is paid back to the lender. As with any financing process, you’ll want to make sure that loan payments along with maintenance, storage, insurance and other operating expenses fit within your overall budget.
Boat loans can come from banks, credit unions, boat dealers and specialized marine finance companies. By working through Tom George Yacht Group, financing a boat becomes much simpler as the entire process is handled under one roof. In this article, we’ll help you better understand boat loans and how financing a boat works.
Boat loans are typically fixed rate, fixed term, simple interest loans secured by the boat being purchased.
While most individuals are quite familiar with auto loans, it’s important to be aware of some key differences between financing a car and financing a boat. For instance, due to the structure of the auto industry and the volume of auto sales, dealers often offer below normal financing rates. Auto manufacturers often offer rebates or subsidies to their dealers which enable special promotional rates. For the most part, this dynamic doesn’t exist with boat dealers, and the interest rates on boat loans are strictly tied to market rates.
Also, it’s worth noting that banks often look at boat loans with a bit more scrutiny. Because boat purchases are considered a more discretionary item compared to a home or an automobile, banks realize that if a borrower gets in a pinch, the boat will likely be the first thing for which the borrower stops making payments. Because of the discretionary nature of boats, this invites a further degree of scrutiny in the boat financing process.
Before applying to get a boat loan, there are a few items that are important to consider. First, consider the true cost of owning a boat. In addition to the loan payment, you’ll want to consider other costs such as maintenance, insurance, fuel, storage, slip fees, registration, taxes and more.
Additionally, you may need to get a marine survey, especially when attempting to finance the purchase of a pre-owned boat. Note, however, that if a dealer is selling a pre-owned boat, the lender will often trust the dealer to have already thoroughly examined the boat (as compared to, say, buying a boat from an individual).
Typically, approval of a boat loan and the terms you can get will mostly be dictated by the following: credit score, debt-to-income ratio and liquidity. While most borrowers are familiar with credit scores, on occasion there are misunderstandings around the debt-to-income ratio and liquidity.
Simply put, the debt-to-income ratio is a way for a lender to analyze the percentage of a borrower’s monthly gross income that goes toward paying existing debts. Often a borrower with a higher debt-to-income ratio is considered a riskier borrower.
A borrower’s liquidity is a very important element when financing a boat. Liquidity shows a lender how much cash (or assets that can be turned quickly into cash) a borrower has. This is important to a lender because the lender wants to know that if there is a loss of income, the borrower can continue to make payments on the loan for a period of time. If cash reserves or liquidity can only carry a borrower for a couple months in the event of income loss, a lender might be hesitant to approve a boat loan.
The interest rate on the loan will typically be based on the size of the loan and the credit score of the applicant. From there, the rate might be slightly adjusted based on the size of the down payment and the term of the loan. By modifying these factors, the interest rate can often move up or down slightly. For example, if a borrower puts more money down or shortens the length of the loan, they might get a quarter point or so lower on the interest rate.
While every specific situation is unique, in general, loans over $150,000 will require more documentation such as tax returns, proof of income and proof of liquidity. While smaller loans may not require as much documentation, depending on your situation, you should be prepared to make available such items. Also note that if you’re self employed or own a business, the business tax returns may be required as the bank will want to verify the validity and sustainability of your income. Upon providing paperwork, the approval process often takes a few days at the most.
Generally speaking, lenders will want a down payment between 10% and 20% of the boat purchase. However, for loans under $50,000, zero down loans are possible depending on the borrower’s credit score and income. For larger loans on yacht purchases where more than $1 million is being borrowed, a 20% down payment is typically the minimum and some lenders may require even more.
If you’re trading in a boat as part of the purchase, your equity in the trade-in boat can be used toward the down payment amount (and be useful for reducing sales tax). Also, by putting more money down, you can sometimes improve the interest rate on the loan.
The term of a secured boat loan is typically somewhere between 10 and 20 years. Smaller loan amounts of, say, under $25,000 will usually be on the shorter end of the term range, and larger boat loans will often be around the 20 year term length. Of course, the longer the term of the loan, the more total interest the borrower will pay over time. However, since most loans are simple interest loans, the borrower only pays interest on the outstanding balance of the loan. The borrower can make additional payments to reduce the overall expense, but the payment amount will remain fixed for the duration of the loan.
As previously mentioned, the interest rate will mostly be dictated by your credit score, the size of the down payment, and the term and size of the loan.
Lenders will require you to have insurance on the boat in order to get approved for financing. Also if looking into extended and enhanced warranties to cover various operational breakdowns, lenders will often permit you to roll the cost of such a warranty into the loan. The reason is simple: the bank loves that you’re protecting and taking care of the asset involved in the loan.
When financing a larger boat, note that your experience can indeed come into play in the lending approval. If you’ve never operated a boat near the size of boat in which you’re purchasing, a lender may be concerned about whether or not you can properly manage and captain such a vessel.
Lastly, lenders may want to know where you plan to store the boat.
At Tom George Yacht Group, our goal is to simplify the financing process, secure the best financing terms for our clients and help buyers clearly understand the financing options available to them. We take an educational approach to financing with an aim towards long-term relationships.
Our finance professionals will educate you on your options and help ensure you make the right decision for you. With an emphasis on your long-term satisfaction, Tom George Yacht Group is focused on building relationships with customers that regularly recommend TGYG to friends and family.
If you have any questions on boat loans or financing a boat, please contact us today.