Boat Loans: How to get one and what to expect.

Ahoy there matey! Are you thinking about getting a boat but aren’t sure if you can afford it? Before you dive into the proverbial waters of bank loans you gotta make sure you understand all the details and ins and outs, so there’s no unpleasant surprises for you.

Financially speaking, this could be the best moment for you to get that dream boat, and factors like cheap fuel, low interest rates and a vast amount of boat models and lenders only add up to this. You also have to keep in mind that since boats have grown larger and more advanced, they’ve also grown in price, so you’re likely to have to borrow money to get one –the average new boat loan nowadays is over $200,000, because there’s a tendency towards larger loans- but bearing that in mind, there’s also a rise in the amount of smaller loans by local and national banks, credit unions and the like.

How much will it cost you

Roughly half of all boats are acquired through financing, and that number is only going up with each new boat purchase, but this doesn’t mean that you’re getting a loan just like that. Thanks to the availability of online resources and information, lenders can get a full background and reference check and income verifications of every potential client, thus making it a complex (albeit not too complex) process but luckily for you, your friend Captain D is here to guide you.

You can use a loan calculator or get in-person assistance, but generally speaking, there are some things you must consider and some variables that come into play, but there are some generalities that hold true for the majority of boat loans:

• Interest rates usually go down as the loan amount goes up.
• Interest rates tend to go down as the term of the loan goes down.
• Higher loan amounts can be stretched over longer periods of time, usually ranging from four to twenty years.
• In most cases, the lender will base a loan on a 10 to 20 percent down payment.
• Most lenders will be looking for credit scores of 700 or higher. You could get a loan with a lower credit score, but usually no lower than 600 and you should expect to have to pay a penalty like a higher interest rate or larger down-payment.

How to get a boat loan

The process, as I previously said, can be a little complex, but you could narrow it down to list of things that lenders usually go for:

• As you can imagine, a high net worth is quite appealing to banks. Usually a 2:1 net worth/debt ratio is pretty good. Banks and financial societies also usually look to cross-sell their products, and this makes high net worth individuals some ideal opportunities for other kinds of financing that can (and generally will) include primary residence, vehicles, businesses, second homes and the like. Also, since the lender will want to make sure that you’re not overextended with other loans.
• As I said earlier, credit scores around 700 or higher are perfect, but around 600 is usually fine if all the other factors are looking good for you.
• Is important for lenders to see that the borrower has previously managed loans of similar or bigger size in the past. This tells them that the borrower won’t be overwhelmed by the payments. In the same spirit, liquidity is very important too, as getting into the loan shouldn’t consume all the borrower’s resources and assets.
• If you have previously gone through this process, it could greatly play in your favor, because lenders know that boaters with some experience do understand the requirements of the loan and the ongoing and constant expenses of owning and maintaining a boat, thus making them less likely to bite more than they could chew when choosing a ship.
• A steady job with a steady income, a good history in your current profession and a primary residence are factors lenders take well into account. Ownership of other high value assets is very helpful too, as they constitute secondary sources of repayment. Stability, consistency and predictability are your best friends in this case. Lenders don’t like surprises.

Lending Climate – Testing the waters

You gotta consider the fact that interest rates reached the bottom in 2014, but they’re still pretty low by historical standards, so you can expect 5 to 6 percent rates. And of course, the amount of down payment required for the loan will depend on things like the price, the kind of ship, its age and your general credit profile, so 15 to 20 percent down payment is usually the amount you can expect to pay on the majority of monohull cruisers.

For multihulls and houseboats, as you can expect, a larger down payment is usually required. Technically, you could get a zero-down lending, but it would take a special lender and a particularly good borrower profile, not to mention that it will most definitely lead to higher monthly payments.

Take into account that the majority of boat loans are for 15 to 20 years, usually with no penalty for pre-payment; lower loan terms mean lower payments but more total interest paid, and you can get a three-month reprieve from payments after the purchase with a 90-day deferred loan, which could increase monthly payments for the loan duration, but only by a slight margin.

The timeframe for new boat loans to originated, processed and closed is usually about a week, but financing for pre-owned ships takes more time. A lender that is familiar with the marine industry can and will process paperwork much faster, and also provide you with helpful guidelines of all you need for the loan, while also being capable of referring needed resources. Try to process your loan with one of these guys instead of, say, your personal banker.

Quick tips to make the process smoother

Did you know that borrowers can pay cash to get the ship immediately, but opt to finance later? Or that tax deductions are possible for this? Yes, as long as your ship has a bed, a head (bathroom) and a galley, it qualifies as a second home, making the interest deductible on your federal tax returns.

You could even put a boat into a family trust, but if you do, be sure to account for additional costs (attorney fees, mostly), or even put it into single-asset limited liability corporations, if the boat is meant for personal use. This will net you some sweet tax advantages, particularly when selling the ship.

On an additional note, financing is not only for the full price of the vessel, so you can often throw in hard or tangible assets into the loan. This could include electronics, bottom paint, extended service plans or anchoring packages.

Last but not least, keep in mind the fact that both boat dealers and brokers have a great deal of interest in selling a boat and have relationships in the marine industry with lenders, insurers and the like, so they can always be a great way to get assistance and consulting on the lending process.

The lending process has become more rigorous now than it was some years ago, and the background and reference checks may be much more thorough, but the numbers of loans is increasing, and this can only mean a thing: More and more boaters can qualify for a loan, so why not take advantage of this fact?

There you go, Skipper. I hope this guide can help you get into your dream ship, so you can truly experience navigation to its fullest. Also check out the following link to a Boat Loan Calculator.

As always, see you on the waves, Skipper

Captain D