Boat Finance 101
by Tim Banse
Financing a boat is like a Las Vegas magic act. At first glance it’s mystifying, but once the nuts and bolts have been explained, it’s a breeze to make that Bengal Tiger disappear. With that in mind, let’s do away with the smoke and mirrors and get to some of the basics of boat financing.
Choosing a Lender
You’ll be pleased to learn that today’s money lenders pride themselves on offering instant gratification. They know once you’ve settled on a particular boat, you want to be on the water enjoying it within the week. So bankers approve, or disapprove, boat loans in less than an hour. Lenders with an Internet presence can decide your fate in minutes, often 24 hours a day, seven days a week. You just fill out and submit the online application form.
When selecting a lender, check to see if they have developed a specialty in boat loans. This is particularly important when buying a used boat. A boat savvy lender will be familiar with pertinent law, such as possessory interest and mechanic’s liens. In other words, the lender can save you the nightmare of buying a boat that doesn’t have a clear title or a deadbeat’s boat that could end up costing you thousands of dollars to pay off yard fees and marine mechanics.
Boat savvy loan officers also know which guidebook to reference and how to add value and subtract for options or damage. For example, these officers know to depreciate a saltwater boat from 10 to 15 percent off its listed value. The NADA guidebooks tend to be used by lending institutions and insurance companies when establishing a boats value. Dealers, on the other hand, tend to use the BUC books with their higher retail prices.
Shop around for the best terms by contacting several lenders. Compare interest rates, required down payment and term of the loan. If you can afford higher monthly payments, the 10 year loan is often a wiser purchase than a 15 or 20 year note. The reason is simple. Statistically, you’re likely to want to sell your new boat for a bigger one in about three years. On a long-term note this means that you would not yet have whittled away any of the principal by the time you are ready to sell. Besides, shorter term loans cost less over the long haul.
A standard down payment on a boat is 20 percent. In some situations, however, the lender might require 25 percent. Obviously, you must be creditworthy. With that in mind, anyone who intends to borrow money should first check their credit history. Ask a prospective lending officer which of the big three credit reporting agencies will issue the report on you. Get a copy of your report from that credit bureau and scrutinize it. If there are any errors or outdated information, get them corrected before you apply for your loan. If you have any delinquent accounts, bring them up-to-date.
Besides paying your bills on time, other factors a loan officer will consider are your job stability, salary, disposable income and the ratio of installment debt to income. Lenders will look at your debt to income ratio to ensure that your monthly loan payments for home, second mortgage, car, student loans and boats will not total more than 30 percent of your adjusted gross income.
You should also know some lenders require tax returns with all attached schedules. Moreover, if you own a partnership or corporation, they’ll need the last two years or corporate returns, again with all schedules. Also plan on providing statements for checking accounts, money market funds and any other bank statements that can prove liquidity.
A professional survey is an indispensable part of any used boat sale, and any lender worth his salt requires one. That’s because a surveyor won’t look at your prospective dream boat with rose colored glasses. Instead, he will see defects you’re blind to. Surveyors charge by the foot, with costs ranging from a couple hundred to thousands of dollars, depending on the size of the boat and where the boat lies. The expense of a pre-purchase survey could save you many thousands of dollars later, plus the aggravation of knowing you were taken for a ride. If that happens, you’ll end up hating the boat, not loving it. As the buyer, you’re responsible for hauling and survey fees, but you’ll be happy you spent the money when the surveyor discovers an osmosis-blistered hull or delaminated deck core you hadn’t noticed. Also know that boats that do not survey well are hard to finance and even harder to insure.
When considering how much of a loan to apply for, keep in mind that no matter how well optioned a boat, there remains a boatload of gear that’s not included in the purchase price. So figure on adding a couple hundred dollars or more to the loan for preferred accessories. And don’t forget about an extended service contract for the engine and drive as well as the cost of insurance. All these things cost money and should be included in the loan.
Finally, don’t forget the tax consequences. If your boat has a berth, a permanent head and galley, odds are very good it qualifies as a second home. That means you can write off the cost of interest on your income taxes. Unfortunately, portable heads do not qualify for this write-off.