Boat Loans 101: Should You Finance a Boat?
Okay, I’ll say it: buying a boat can be expensive. That’s why 70% of boaters choose to finance their boat. But what exactly is financing a boat, how can you prepare for it, and should you finance a boat? All of those questions - and more - will be covered in this blog!
Purchase Price
Similar to other types of financing, boat loans are personal installment loans that are offered by lenders, who agree to lend you a fixed amount of money. From there, you pay the loan off (with interest) by the agreed date. The greatest difference, however, is that the interest rates are often higher for recreational vehicles than they are for your home or car.
The average car loan interest rate currently hovers around 4%, while a recreational boat loan typically averages between 6 and 8%. Houses and cars are seen as essential assets - while boats are not. So, in the event of financial hardship, you would likely give up your boat before your car or house - making a boat loan a higher risk for the lender - therefore the higher rate.
There are three different types of loans you can utilize for a boat: secured loans, unsecured loans, and a second mortgage.
Secured Loans
Secured loans are backed by collateral, such as a savings account or vehicle. This means that in the event the boat cannot be paid for, your lender can place a lien on your collateral, practically possessing it until the loan is paid off. Because this is a lower risk to the lender, interest rates are often lower for secured loans.
Unsecured Loans
On the other hand, with unsecured loans, your loan is not backed by collateral. Instead, approval for the loan is solely based on your credit score and finances. Rates are often higher for unsecured loans and lenders are typically more selective about who they would approve for a loan.
Second Mortgage
Second mortgages are an option for individuals who do not want to take out a personal loan. But here, your home serves as collateral. Of course, this is the riskiest loan option. Second mortgage loans also tend to have lower interest rates.
Credit Score
Before you apply for a loan, it’s important to do a little research. This first step will help you understand if and what you will be able to finance. And that’s your credit score.
First, it’s important to know your credit score. This magic number will let you know if you are likely to be approved for a recreational loan. Since recreational loans are a higher risk for lenders, they’re also more selective with what credit scores they will accept for loans. Generally, you’ll need a credit score above 600 to be approved for a boat loan, although we’ve seen people with lower scores be approved.
Additionally, knowing your credit score can help you approximate your interest rate, which we’ll use in a couple of minutes for payment calculations. A better credit score equals a lower interest rate.
There are many great options for you to check your credit score - for free! I use Credit Karma. Credit Karma uses a slightly different grading model to determine your credit score, however. They use “VantageScore” to generate credit scores, where most lenders will be looking at your FICO score. Credit Karma’s scores should closely reflect your credit score, but it may not be the final score your lenders see - and ultimately use to determine your loan approval.
Another important factor that lenders will assess is your debt-to-income ratio and employment/housing stability:
Your debt-to-income ratio – or DTI – is the percentage of your income that you devote to paying off debts, which include but are not limited to: mortgage payments, credit cards, student loans, auto loans, and personal loans. Rent payments, although they’re not technically “debt”, are also included in your DTI. Boat loans will likely be denied if your DTI is higher than 40 or 45% once the new boat loan is factored in.
As far as employment and housing stability goes, the longer you've lived in the same area and worked for the same employers, the more favorably a lender is likely to look at you for a boat loan approval.
Pre-Approval
Now that you know your credit score, DTI, and stability status, it’s important to see if you can get pre-approved for a loan. All the time you spend researching and testing out boats will be for naught if you can’t get approved!
Marine dealerships - such as ourselves - have in-house finance applications which are then sent to their various lending partners. So, you can do it that way or manually apply for pre-approval yourself. You’d have to individually go through different lenders and assess each offer.
Many lenders require a minimum down payment, which often ranges between 10% and 20% of the loan’s value. However, there are plenty of lenders that offer lower down payment rates. Regardless, plan accordingly.
Approval
Alright - now you’ve got a couple of offers, but need to decide which option is right for you. Let’s pretend you’re wanting to buy this SunTracker PartyBarge 22, which will cost you around $50,000 - including a trailer, prep, and freight.
When you’re comparing lender offers, it’s best to choose the offer with the lowest rate, fewest fees, and repayment terms that align with your budget. The longer-term length of the loan, the lower the monthly payment. However, interest rates can be higher for longer-term lengths, so you’ll be accruing additional interest that way. Vice versa: the shorter the term, the higher the monthly payments - but you’ll be paying less in total interest at the end of the term.
Now’s the time to do some calculations. Assuming we take out a $50,000 loan and pay the boat off over 15 years with a 6% interest rate, we’d pay $421.93 a month. If, for example, we had a lower credit score, which - in turn - raises the interest rate to - let’s say 8% - the monthly payment jumps to $477.83 . Point being, keeping your score healthy can really help you manage monthly finances and even buy a bigger dream boat with the same monthly payment!
Here’s a little tip: if you’re able to, put additional money down when you can throughout the term. If we just put $50 a month towards the initial loan we talked about, you will end up paying off your boat 2 years sooner, plus save extra on interest! Putting additional cash towards your boat over the term is a great way to knock off some cash you would have otherwise spent on interest.
Outro
So - should you finance a boat? If you’re not able to pay off the boat in full, then of course. Financing a boat allows you to pay for the boat monthly and control how long the loan term is. Just remember: the lower the rate and shorter the term, the more money you save!