Reading Boat Loans: Best Ways To Finance A Boat – updating 2022
Cheap fuel, low interest rates, tons of new boat models and lots of lenders make this a near perfect time to buy (and finance) a boat. Borrowing is also becoming more and more necessary these days as boats have gotten bigger and more expensive. The average loan for new boats today is over $200,000, so there has been an uptick in larger loans. However, smaller loans are also attracting attention as national and local banks, financial services firms and credit unions have returned to lending to ships after the recession. It might be time to dive in and get that dream boat.
Boat Loan Calculator
About half of all boats are financed and this percentage increases with the purchase of new boats. But it’s not a world of stated income anymore. Lenders are doing their due diligence and with today’s access to online resources it’s easy to do background and reference checks as well as income checks so the process has become a bit more complex. Fear not, there are many experts out there to guide the borrower and make the process less strange and daunting. An excellent resource for available lenders and lenders is marinelenders.org, or you can get personal marine loan assistance and tools at boat.com.
Boaters can expect a rough, standard 20/20/5 loan (20-year loan with a 20 percent down payment at 5 percent interest) to be processed quickly and with relative ease.
How to get a boat loan
Becoming an attractive borrower today has many facets. Here are a few things lenders like:
- Unsurprisingly, high net worth appeals to banks. A net asset to debt ratio of 2:1 is good. Financial institutions are also looking to cross-sell their products, and high net worth individuals present opportunities for other types of financing, including a primary home, second home, car, RV, and even a business. Your level of debt will also be important. The lender wants to know that you are not already overwhelmed with other loans.
- Lenders want to see that the borrower has previously managed loans of a similar amount and is therefore not overwhelmed by the current transaction. Liquidity is also important. Just getting into the loan shouldn’t eat up all of the borrower’s resources. Lenders are looking for cash to cover 12-16 months of payments should the employment situation change.
- Stability and consistency are key. Permanent employment, current occupation history, and primary residence are all aggregated by a lender as part of the candidate evaluation process. Having other high quality assets also helps as they are potential secondary sources of payback.
- Credit scores in the 700 and 800 range are ideal. However, today even values in the 600 range can be acceptable as long as other criteria look good.
- It is a plus to have gone through the boat buying process beforehand. Lenders know that experienced boaters understand the requirements of boat lending and the ongoing costs of boat ownership and are less likely to overspend when choosing a vessel.
Current credit climate
Interest rates bottomed out around 2014 but are still low by historical standards and borrowers can expect interest rates of 5-6 percent. The amount of deposit required depends on the age, price and type of vessel, as well as the borrower’s general credit profile. Expect a 15-20 percent down payment for most monohull cruisers. Multihull loans typically require a larger down payment (20 percent), as do houseboat loans (25 percent). Zero-down borrowing is possible, but it requires a special lender and an exceptional borrower profile, and this will definitely result in higher monthly payments.
Most boat loans have a term of 15 or 20 years and often there is no penalty for prepayment. Longer terms mean lower payments, but also more total interest paid. It’s possible to get a three-month payment deferral after the initial purchase with a 90-day deferred loan, which can (very easily) increase monthly payments for the duration of the loan.
New boat loans can be issued, processed and closed within a week, which is much faster and easier than real estate loans. Financing used ships takes longer. Lenders who know the marine industry can process the paperwork faster, provide guideline worksheets on all things required for a boat loan versus a real estate loan, can point to resources needed, and have an interest in completing the loan. They can be infinitely faster and easier to use than a borrower’s personal banker.
Fun facts and red flags
You may not be aware of some of the little perks that can help you during the financing process. For example, borrowers can pay cash to get the ship immediately but opt for later financing (e.g. 3-6 months later but not years later). Tax deductions are also possible. As long as the ship has a bed, toilet, and galley, it qualifies as a second home, allowing the interest to be deducted on federal tax returns.
In addition, a ship can be incorporated into a family trust, but in this case it is important to factor in additional legal fees. And more and more borrowers are bringing yachts into limited liability companies as long as the boat is for personal use. This has some tax advantages, especially when it comes to selling.
Financing does not only refer to the price of the boat. Hard or tangible assets can often be included in a boat loan, and these can include electronics, anchor packages, bottom paint, and extended maintenance schedules. However, the labor required to install electronics, apply floor paint and perform commissioning work for new boats cannot be funded.
Finally, remember that boat dealers and brokers are great free resources. You have a vested interest in selling a boat and have relationships with lenders, insurers, appraisers and repairers in the marine industry. You can guide a borrower through the loan origination process and manage expectations of the timeframe and necessary steps.
Now for the red flags: First, insurance is necessary and must be arranged before the loan is closed. Your broker can help you by providing you with a list of reputable marine insurance agencies.
Liveaboard status is frowned upon, so if the boat is going to be your primary residence, you’ll likely face a few hurdles. Eviction laws make it difficult to repossess an inhabited boat, and by definition, a liveaboard probably doesn’t have a primary residence to provide collateral either. However, financing a boat to use as a home is not impossible.
Many lenders do not finance a boat to charter as it is used for commercial purposes. It is possible to finance a charter boat, but there are specific lenders and rules for this process.
With over 85 percent of boats sold in the US being used, it’s a good thing that used boats can also be financed. However, it is more complicated and often more expensive to get a loan for a used ship. First, used boats require an appraisal or appraisal, which means towing and other costs. Sometimes a bank will need comparative data in addition to the survey to determine fair market value and comparative data can be difficult to find on unique/older vessels. A title check is required to ensure there are no outstanding liens. Some lenders can finance a boat that is up to 20 or 30 years old.
Finally, think about the total cost of boat ownership. For example, buying a $500,000 boat doesn’t mean you’re financing $400,000 even after paying a 20 percent down payment. Expenses to include in the total price include USCG documentation fee (approximately $500), survey for older vessels (approximately $25/ft overall length), insurance, loan processing fees, taxes, freight, commissioning and more .
The lending landscape has changed since the depths of the recession, and the vast majority of boaters will qualify for a loan. The process is more rigorous and the background and reference checks may be more thorough, but the number of loans being made is increasing, which is good news for boating as a whole.
With more lenders than five years ago, subprime borrowers with credit scores in the 600 range can still qualify. The trade-offs will be higher rates and down payments, but many lenders are now willing to cut a deal.
Why not step into such friendly waters? With a good lender, the boat you’ve been eyeing might be within reach after all.
For more information on buying a boat, see our boat buyer’s guide or read How to buy a boat: tips for first-time buyers.
Editor’s note: This article was originally published in February 2018 and updated in February 2019 and March 2020.
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