Boat Financing – Boat Loan Primer
By Virgil Zetterlind
If you’re in the market for a recreational boat, you know by now that a boat (even a used boat) can turn out to be the most costly purchase you’ll consider apart from your house. Because of the size of boat purchases, making an informed decision can save you big when it comes to boat financing. We outline below several of the larger decisions to be made in considering a boat loan, such as basic boat loan types, insurance, depreciation of value, and taxes. We’ve included the basics (and even some of our own helpful personal anecdotes), but please consult a professional for more comprehensive information before making a decision.
1. What’s My Budget?
Before considering your boat financing options, you’ll want to know what you’re looking to finance! Start with a realistic budget and stick to it. This budget must include more than just the loan payment. Consider downpayment, boat storage costs, upkeep and repairs, insurance, gas, and anything else related to using your boat. Even a new boat under warranty will likely require non-covered service in the 1st year. Once this exercise is complete, you should have a good idea on what your allowable monthly boat finance cost will be.
You also need to consider what you can reasonably expect to borrow. In today’s market, this tends to be more than is wise, but there may be cases where existing debt, income, or credit history limit your options. A check of your credit rating and score is a good idea – as this will also have a bearing on your boat loan options and interest rate.
2. What are My options?
With a budget in mind, you can now consider the basic loan types. We will cover each in general here before getting into specifics on each type.
Collateral Boat Loan- Similar to your basic car loan, a collateral boat loan uses your boat’s value as the lender’s security. Loan terms and rates vary widely – typically 15 years from 25-100K, and then over $100K, 20 years can become available. Most collateral loans require a 10-20% downpayment (although we’ll discuss no-money down options later).
Home Equity Boat Loan- Given the rise in home values over the past few years, the home equity loan has been a popular method for boat financing. In this case, you are borrowing against your home – leaving you a clear title on the boat. As a home loan, interest charges are normally Federal income tax deductible which lowers the effective interest rate a bit. Home equity loans come in 2 principle types: the Line-of-Credit and the Fixed.
The Collateral Boat Loan
Interest on a boat loan may be tax deductible under the “2nd Home” deduction if the boat includes cooking, sleeping, and bathroom facilities (i.e. at least a stove, bunk, and port-a-potty). Many of the newer small cuddies now include a stove for this very reason. Lenders will require you purchase and maintain full insurance on your boat – so be sure to consider this in your cost equation.
For new boats, standard loan terms allow financing up to 85-90% of the total purchase price plus tax, registration, and extended warranties. For buyers with excellent credit (
730+) some lenders will offer no-money down loans, but these can be risky due to depreciation. With used boats, loan terms depend on the age and value of the boat.
The Home Equity Boat Loan
Given the boom in home values and until recently low interest rates, home equity loans have grown more common as ways to finance recreational purchases. Interest on home equity loans is generally tax-deductible, which is attractive for boats that would not otherwise qualify. Rates are generally set by the “Loan-to-Value” (LTV) ratio, which is simply the amount you owe on your home divided by your home’s total value.
To borrow against the value of your home, a home appraisal may be required. This is more likely if you are requesting a high LTV loan or you claim significant appreciation over a short time period. The best rates are for LTV’s less than 75-80% and many lenders will cap boat loans to around 80%.
Home equity boat loans are more likely to require closing costs than collateral boat loans. Costs can vary between lenders, but are generally a few hundred dollars and may include appraisal fees. Competition between lenders does lead to reduced closing costs or waived costs – especially if the loan is held for at least 3-5 years. When we shopped around in the spring of 2006, home equity rates were running about a 1/4 to 1/2 percent higher than boat loan rates.
The Line-of-Credit Boat Loan
Line-of-Credit (LOC) loans do not initially have fixed terms. They act a bit like credit cards in that you have a “limit” to borrow against, but only pay interest on the amount borrowed at any given time. Under an LOC boat loan, you may be able to make interest-only payments in the early years. LOC’s are quite popular for lenders since the open-ended terms and interest-only payments yield bigger profits in the long run as such most lenders offer no-closing cost options for new LOC’s. The LOC’s interest rate is normally variable and is based on the prime lending rate – meaning that as rates rise, the lenders also make more money. In the consumer’s favor, most LOC’s can be “converted” to a fixed loan at some future point – but keep in mind that if rates have risen significantly, you can be caught with a lot of debt.
The Fixed Home Equity Boat Loan
The fixed loan operates like a traditional mortgage or boat loan in that the borrower has a fixed payment term and interest rate. Rates are often a bit (
1/2 point) higher than the LOC (remember that in the long run you’ll likely still save compared to the LOC) but will not change over the course of the loan.