Financing a New Boat
What to know before you sign
Published: Saturday, January 7, 2023 12:00 pm
By: Zuzana Prochazka
If you’re contemplating a new boat purchase, chances are you’ll be using financing. Approximately half of all boats are financed, with the average new boat loan now being over $250,000. With today’s online resources, it’s easy to do background and reference checks and income verifications, so lenders have more information on potential borrowers, and the process has grown more complex. No worries, though; experts can guide you and make the process less intimidating.
How It Works
Lenders who know the marine industry can process paperwork faster than your personal banker, provide worksheets with guidelines of all the things needed for a boat loan versus a real estate loan, and refer to other helpful resources if needed. Loans for new boats generally originated, processed, and closed quickly (sometimes in a week), which is much faster than real estate.
If you’re shopping for a marine lender or loan originator, an excellent source of available names can be found on the National Marine Lenders Association’s website.
Boaters can expect a standard 20/20/5 loan (20-year loan with a 20% down payment at 5% interest) to be processed quickly. Interest rates are changing, though, so standards may vary. Most boat loans have a term of 15 years, and there’s usually no penalty for pre-payment.
How to Become an Attractive Borrower
Lenders examine the following circumstance about their potential borrowers.
- A solid loan history and liquidity: Lenders are looking for borrowers who have previously managed similar loans and won’t be overwhelmed by the new amount. Lenders also look for liquid assets that will cover 12-16 months of their loan payments if circumstances like a change in employment should occur.
- Stability and consistency: Owning a primary residence, being steady in your employment history, and having other high-value assets for collateral will help during the evaluation process.
- Previous boat ownership: Experienced boat owners who know what they’re getting into and can accurately calculate the total cost of ownership are valued more highly by lenders.
- High credit score: Scores in the 700s and 800s will help lock in a new loan. Lower scores may be acceptable if other factors (like collateral) are favorable.
- High net worth: A 2:1 net worth/debt ratio is important because affluent individuals represent opportunities for lenders to cross-sell other kinds of financing products, including second homes, RVs, cars, and more.
- Low debt/equity ratio: Lenders look for borrowers who aren’t already overextended with other loans.
What You Can Finance
The more you can sweep into a boat loan, the more cash stays in your pocket. Tangible equipment may be rolled into a boat loan, including ground tackle, electronics, antifouling paint, and even extended service plans. The labor associated with the installation of any assets (like applying bottom paint) cannot be financed.
Tips That May Help
- Financing can be done upfront or later: Borrowers can pay cash to lock in the boat but opt to finance a few months later.
- Some boats may be tax deductible: As long as the boat has a bed, a head, and a galley, it may qualify as a second home, so the loan interest may be deducted on federal tax returns.
- Boats in trusts: A boat may be put into a family trust or be treated as a single-asset limited liability corporation.
- Insurance: Find a way to insure the boat before the loan closes to protect your new asset.
- Living aboard: It’s generally not looked upon favorably for a boat to serve as a primary residence because eviction laws make it harder for a lender to repossess the asset. It’s also presumed that a boat that’s lived on will be subject to more wear and tear due to extensive use, thereby depreciating ahead of expected schedules.
- Charter: Some lenders won’t finance a boat that will work commercially in charter. It’s possible, but it may take a specialty lender. Since many boats now work in peer-to-peer boat rental and sharing services, it’s likely that some lenders have an exception to this rule now.
- Loan pre-approval: Having access to ready financing may put you ahead in the line when you go boat shopping. That may help you lock in the boat of your choice even during these times of tight inventories.
- Total cost of ownership: Savvy buyers know there are many out-of-pocket expenses that cannot be financed – vessel registration or U.S.C.G. documentation fees, dockage, ongoing maintenance, insurance, loan processing fees, sales tax, property tax, freight, commissioning, and more.
Lean on Your Resources
Boat dealers and brokers have a vested interest in selling you a boat; they are great resources to get you through the financing process. Some dealers have in-house financing departments so they can hand-hold a borrower through the lending process and manage expectations. They also have relationships in the marine industry with outside lenders, insurers, surveyors, and repair facilities. Best of all, their expertise is free to you during the purchasing process.
Lean on the experts, don’t be intimidated, and jump in. The (financing) water is great.
A version of this article appeared in the Winter 2023 issue of Great Lakes Scuttlebutt magazine.
