Non boat-owners constantly display a depressing ignorance about boats and boating. When you talk about your boat, your friends probably imagine you in a 60-foot yacht, even if you’re just fishing out of your kayak on weekends.
I’m sorry, Terry. What part of this isn’t living up to your expectations?
Nevertheless, boat loans are extremely important to millions of boat owners. It can be difficult to shell out thousands in cold hard cash for a boat, and for many of us boat loans are the only way we can make that purchase. Here at Agent Water we primarily provide insurance advice, but we have noticed a high degree of interest in boat loans. That being the case, we figured you might benefit from what we know. We can tell you what to watch out for when you’re looking at boat loans, and give you links to a few sites that may help you plan for a boat loan or decide whether to get one.
Important Note: You’ll need to check with potential lenders about their minimum allowable loan amounts. Many companies won’t give you a loan for any less than $10,000. Some companies won’t give you a loan for less than $25,000. The reason, of course, is money. Lenders don’t make money when they get the cost of your boat back. They make money on your interest payments. If you only take out a loan for a few thousand dollars and you pay it back within a year, that lender won’t make much money. They’d much rather lend $30,000, get the money back over the course of a few years, and make several thousand dollars in interest.
So they’re unlikely to give you a loan for that Jon boat you’ve been craving
Boat Loans and Boat Insurance
Let’s start where we’re most knowledgeable, as boat insurance is bound up tightly with boat loans. If you have had a boat loan in the past you certainly know this, but it is worth mentioning again. If you are taking out a loan to buy a boat, your lender will require you to buy insurance to cover that boat. We have yet to find a lender that doesn’t require insurance as a prerequisite for the loan. Even if we did find one, I wouldn’t be inclined to trust them. Your lender uses your boat as collateral, so they can repossess it if you stop making payments. They require insurance to protect that collateral, and their mandatory limits are often higher than you would set for yourself. As a result, you’ll want to check the limits they require to make sure that you meet them. Under many contracts, the lender can repossess your boat if you fail to maintain insurance at their required levels, so it’s important to get right.
Always make sure your policy covers you for fire (as they are far more common than people think, especially with gas engines). In addition, you should know whether your policy covers “Replacement Value“, “Actual Cost“, or “Agreed Value“, which we discuss in detail on our Fine Print page. Those details become crucial if you have an outstanding loan on a boat that sinks or is damaged.
We mention boat insurance for two reasons. First, you should know that you will need to find a policy that meets your lender’s requirements so that you can get on the water as quickly as possible. Second, when planning your boat budget, you will obviously be thinking through your costs (monthly payments, boat slip, registration fees, gas, etc.). It is imperative that you take insurance into account as well. You don’t want to buy something at the very edge of your price range if the insurance will clean you out.
Say it with me: If the insurance is unaffordable, then the boat is unaffordable.
Types of Boat Loans
The most common type of boat loan is a collateral loan (think about what you have on your car or house). There are other options when it comes to bank loans, however.
- As we said above, the most common loan is the Collateral Loan. This loan allows you to borrow money to buy your boat but leaves a lien on the boat’s title. If your boat is a total loss in an accident, your insurance will pay the lender whatever is left of your debt (hence the insurance requirement above) before paying you. If you fail to make payments, the lender is allowed to repossess your boat after a certain period of time. *Recommended
- If you own a house, you may qualify for a Home Equity Loan. In a home equity loan the bank will take money out of the equity of your house to pay for the boat. If you’ve developed significant equity in your home, this may sound good to you. The issue, of course, is that your home then becomes part of the collateral for your boat.
- Another kind of loan is a Personal Loan. Typically these are only available to folks with extremely high credit scores and a high income. That said, if you qualify you can borrow on the faith of your name, rather than using your boat or house as collateral.
All borrowers are unique, and the right option for you will depend on your circumstances. Even so, if the option is available to you, we would tend to recommend a collateral loan over a home equity or personal loan. That way, the debt on your boat remains separate and won’t impact your home mortgage or make you personally liable.
It’s fiscally risky to bet the big one on the small one.
Rates, Downpayment, and Terms to Expect
Like home loans and car loans, the terms for boat loans hinge largely upon your credit score, borrowing history, income and existing debt. Even so, we have a few figures that are worth your consideration.
- First, the Rate. We’ve seen everything from 4% to 7% and even 8.5% and higher for some borrowers with less than solid credit histories. This rate will depend on the national interest rate set by the Federal Reserve, and on your credit score and borrowing history. Think of the national rate as a floor. You won’t get lower than that (and you’re unlikely to even get that low), and things like a low credit score or a history of defaulting will raise rates further. If you can get your rate fixed, that is highly preferable to variable. We’re likely to see national interest rates rise for the next few years at least, and you don’t want your rates to rise along with them.
- For Downpayments we typically see the minimum at 10%. If you can afford a higher downpayment (15-20%) you may be able to lower your interest rate, and many of us can’t get a loan approved with a downpayment under 20%. though its highly likely that you’ll see a benefit (or not be approved) at something closer to 15-20%.
- The Term of your boat loan (aka when does your lender expect to get all their money back?). We’ve been surprised at the number of 10-year loans we’ve seen. Most loans, however, last around 5 years before they become prohibitively expensive. That said, for more expensive boats you may be able to find greater availability for longer-term financing.
So, what are the chances on getting a 9,000-year loan?
Age of your Boat and Boat Loans
You may know that your buddy’s old Chris Craft is in great shape. After all, you know that he’s always stored it indoors, and that he’s had it professionally tuned and winterized each season. Nevertheless, a boat loan officer will only see a 35 year-old oval made of fiberglass. If you search around you can find boat loans for much older boats, but assume that once it hits the 20-year mark, a loan is far more difficult and expensive to acquire.
Are there exceptions? Absolutely. Certain factors can improve or lower your chances of getting a loan:
- Is the engine diesel or gasoline? Insurers tend to consider an old diesel boat safer than a gasoline-powered vessel of the same age.
- Is the hull wood, aluminum, steel or fiberglass? Each material has its advantages and disadvantages but older metal boats will certainly require a survey (which can run several hundred dollars).
- Is the engine original or recently replaced?
- Does the seller have maintenance records?
Your lender doesn’t want to have to deal with your insurance company, except as a last resort. In their eyes, the best case scenario is that nothing ever happens to your boat and you pay off your loan without trouble (though if they can raise your interest rates and get a little more out of you, they’re unlikely to miss the opportunity). As a result, loan officers will be wary of anything they see as a “risk” and they view older boats as inherently risky.
Your lender hates calling Geico as much as you do.
Obviously there are dozens more variables, but you should do as much research as you can before talking to a loan officer. That way you can knowledgeably answer any questions that come up.
Where to get a Boat Loan
You can generally acquire a boat loan from three types of entities. ,
- The Boat Dealership: For new boats most buyers work through the dealer. Many dealers have their own lending options, financed through a third party. This allows them to incorporate whatever deal they are providing you into the loan. Their deal will likely come in one of three forms: a period of no interest payments at the beginning on your loan, a lower interest rate, or a reduced principle (the cost of the boat).
- A Bank or Credit Union: If you are buying a used boat and need a loan you are likely to use a bank or a local credit union.These will generally finance your purchase directly, whether you use a collateral loan or your home equity. Banks and credit unions will likely require a survey before approving any loan (to avoid that risk we talked about earlier).
- There’s a relatively recent form of lending, called “Peer to Peer” or “P2P”: P2P lenders are up-and-coming industry changers who help buyers borrow with other people’s money as opposed to a bank. You can find P2P lenders online. They tend to look only at your credit score, and their fees tend to be low (they don’t need to pay to keep the lights on at all their bank branches). However, if your credit score is low, you are likely to see some truly insane interest rates, or be denied outright. A default on your P2P loan can also impact your credit score far more than defaulting on a traditional loan.
Sure, a bank is old-fashioned, but at least there’s a place you can go and complain when they change up the loan terms on you.
Obviously there are advantages to each source of financing, but it is important to know about each of them before deciding on one.
Tools to use when planning out a loan.
There are dozens of tools that you can use when planning out a loan but a few of our favorites, especially when it comes to early in the process figuring out what you can afford, are the following;
- LightStream has great approximate interest rates based on the length of the loan and its amount. It won’t be able to give you pinpoint accuracy, but it may help you ballpark the interest rate you can expect. We should note that LightStream offers no guarantee you will get that rate or even be offered the loan. Nevertheless, if you’re just beginning your search, it is a good starting place.
- Mountain American Credit Union has a great, easy-to-use tool. If you use a LightStream estimated interest rate and the price range of boat you’re looking for, the tool can quickly help you ballpark your monthly payments.
- Essex Credit While we have never used them, we do find their listing of rates and terms (lengths) to be particularly straightforward. Obviously, their chart only provides a rough estimate, but it’s still encouraging in an industry that is typically less than clear.
- SunTrust related to LightStream listed above, SunTrust bank offers these loans side by side their LightStream peers. Sun Trust Marine loans can lend much larger amounts and have terms that extend up to 240 months.
- Bank of the West is not for buyers who need smaller loans (under $5,000). Bank of the West does seem to have a pretty great tool to estimate your payment. If you’re looking at a larger loan, check out their tool to see if it’s worth considering.
- USAA is the only firm we’ve seen to offer up to 100% financing for you boat. The terms are likely complicated to meet, but it’s still an interesting opportunity for those that qualify.
- Boat Trader Finally, we get to the Boat Trader boat loan link. Boat Trader is figuring out a partnership with Boats Bank, which would do for Boat Trader what many lenders do for traditional dealerships. Obviously it would be huge for Boat Trader’s online marketplace if you could get a loan and buy a boat on the same website. It would take an even bigger chunk out of the traditional boat-buying market, which must keep dealerships up at night. The Link is currently non-functional, but we will update you as things develop.
An Important Reminder!
It is vital to remember that you need to pay your loan ALL YEAR ROUND, not just during your boating season. It’s easier to remember for our southern friends in Florida and elsewhere if you can boat all year round. For those of us who live a bit further north, however, it’s harder to remember to make our boat payment when the boat’s under 26 inches of snow.
Or on top of it. Really, any snow makes it hard to remember that I even have a boat.