Bankrolling a new or used boat can shock borrowers straight out of the water if they don’t understand the lending process. There are ample financing options to find a good deal. Loans are available from manufacturers, dealers and financial institutions – each source with distinct advantages and drawbacks.
PART I: How to finance a boat
When you apply for boat financing, the application process involves a written application (or telephone screening), followed by verification of income and submitting details on the watercraft make, year, model and features. Similar to underwriting on auto loans, the lender will review the applicant’s credit history, debt to income ratio, and the market value of the boat.
Experian reports that terms on auto loans average 69.7 months, with higher subprime terms up to 72 months. In contrast, boat loan terms at Essex Credit, a 30-year-old boat lender and division of Bank of the West, go as long as 360 months on loans of $250,000+.
Jim Coburn, consumer finance consultant and former president of the National Marine Lenders Association (NMLA), says banks and credit unions allow the use of cosigners in a boat loan. Each lender has their own sets of requirements for cosigners. For boat financing companies that do not accept cosigners, there’s a simple way around this limitation: applicants can instead apply for a personal loan that allows a cosigner and use that loan to pay for the boat.
The pros and cons of financing a boat depend almost entirely on the kind of loan used to buy the watercraft. Here are some general considerations:
The Pros and Cons of Boat Financing
- You’ll have predictable monthly payment amounts (with fixed-rate loans)
- You’ll know exactly how long it will take to pay off the loan
- So long as you make on-time payments, financing can help build credit
- The boat can be used as loan collateral
- Variable interest rate loans can blindside your budget
- Unsecured loans may cost more than those using a boat or home as collateral
- Subprime boat loans can carry double-digit interest rates
- Loan payments can tie up cash reserves
Boat loan interest rates — what can I expect?
The interest rate on a boat loan will depend on the type of boat financed and the total amount you’re looking to borrow. But there are three other key factors to keep in mind that are directly in your control.
You creditworthiness. Plain and simple, the better your credit score is, the better your boat loan rate will be. That being said, lenders have no problem extending loans to “subprime” borrowers — even those with credit scores under 550, Coburn says— but they will charge a hefty price for doing so. Borrowers with poor credit can easily face double-digit interest rates ranging from 10-20%, per Coburn — which means your boat loan APR could be higher than the APR on some major credit cards. Furthermore, borrowers with poor credit will also likely face limitations in how much they can borrow and for how long. Repayment terms are typically shorter than those offered to customers with good credit, he says.
Your debt-to-income ratio. Just like a mortgage, a key factor for determining interest charges is the applicant’s debt-to-income (DTI) ratio. Your DTI simply tells the lender how much of your income is being spent on debt payments. To get your DTI, simply add up your total monthly debt payments and divide it by your gross monthly income. A low DTI can help you secure a lower interest rate, while a high DTI may indicate the borrower has maxed out their credit. According to boat lender SeaDream, a DTI above 40% can disqualify loan applicants.
Your down payment. The amount of your down payment will depend largely on the type and age of the boat you’re looking to finance. Some lenders will require a minimum down payment based on the amount you wish to borrow and the type of boat. Essex Credit cites its required down payments by price range as:
- $10,000 – $150,000, 10 percent down
- $150,001 – $250,000, 15 percent down
- $250,001 – $500,000, 20 percent down
- $500,001+, 25 percent down
- Boats constructed from 1919 to 1996, 30 percent down
Other factors include the borrower’s assets, the cost of the boat, the boat’s age, current value and the amount of the down payment.
Boat loan terms
Terms for boat loans are generally pegged to the total amount the borrower finances – not on the current value of the watercraft. For example, boat loans by BoatUS that are financed for more than $100,000 have terms available up to 20 years. According to the NMLA, lenders who only offer boat loans may offer longer terms than those offering multiple loan products.
When considering terms, loan applicants need to recognize that the term directly affects the total cost paid for interest on the boat and the amount charged for monthly payments. A longer term can deliver a schedule of lower monthly payments, but you’ll pay more interest on the boat overall. However, a short-term loan may strap the buyer to payments that put their monthly cash reserves on a perilous edge. Boat loan calculators (more on these later) can be instrumental in finding an affordable balance of terms, interest rates and payments.
What type of boat is eligible for a boat loan?
Financing is available for most of today’s range of new and used boats, including:
- Human-powered craft
- Cabin cruisers
- Fishing boats
- Open-bow craft
- Classic wooden boats
- Canal cruisers
- Wakeboard and ski boats
- Personal watercraft
- Cuddy boats
- Pontoon boats
- Center-console boats
Types of boat loans
Banks, credit unions, and financial service companies are the more-common sources of loans for boat buyers. Many boat loan providers are members of the NMLA. Applicants have a choice of loan types that best-suit their finances and credit. The three major types include
Let’s examine each in order:
Fixed-rate collateral loans
How they work: When consumers take out a fixed-rate collateral boat loan, they can expect to make a predictable monthly payment over the life of the loan, with an unfluctuating interest rate. The collateral used on boat loans typically is the watercraft itself, which can be plucked out of the water by the lender without notice following a missing payment. Borrowers should check their contract to see if there is a grace period for delinquencies. Repo laws vary by state.
The security against the loan is evaluated during the application process. The lender may require a market-value assessment by a professional marine surveyor to determine the value of the security. The larger the boat, the larger the cost for a survey, according to Coburn. “Pricing for marine surveys vary widely for recreational boats and may cost for anywhere from $10 to $25 per foot,” he says. He recommends that consumers choose a qualified surveyor who is an accredited member of the Society of Accredited Marine Surveyors, Inc. (SAMS), an organization of marine surveying professionals that evaluates standards and practices.
Penalties for defaulting: According to Coburn, each lender has its own policy on when a default takes place. “Most lenders we deal with consider foreclosure (boat repossession) more in the sixty days [late] or greater range,” he says.
Who fixed-rate collateral loans are best for: A fixed-rate collateral boat loan is a good option for buyers who don’t have other assets to apply toward the loan. Fixed-rates offer protection from fluctuations in national interest rates. They’re a good choice for consumers who cannot secure a collateral-free loan because of their income, outstanding debt, or low credit score.
Home equity loans
How they work: A home equity loan can provide a borrower a source of cash for buying their boat. The amount you can borrow depends on your current loan-to-value (LTV) ratio and current market value of the home. The LTV represents how much the borrower owes on the mortgage compared to the home’s current market value.
According to Wells Fargo’s lending department, consumers with 621-699 credit scores should expect to pay higher rates on a home equity loan. The amount you borrow and the existing debt on the home, combined, cannot exceed 85 percent of current home value. And your current debt may not exceed 43 percent of your monthly pre-tax earnings.
Pros: The interest rate on a home equity loan is fixed, meaning stable, predictable monthly payments over the term. And the rate will be lower than the interest charged on unsecured personal loans. The lump-sum of the equity loan can be more than the total cost of the boat, which can be a blessing given the insurance and operating costs of maintaining a safe watercraft. Plus, interest paid on a home equity loan may be tax deductible.
Cons: On the negative side, home equity loans come with initial fees and closing costs. In a worst-case scenario, a borrower uses up home equity and, if they default on their loan, they lose their house.
Unsecured or secured personal or “signature” loans can let boat buyers pay for their boat if they can afford the higher interest associated with these loan products. The good thing about personal loans, is that lenders don’t care how you spend the money.
With a secured personal loan, the borrower puts up the boat as collateral. They usually offer higher loan limits than unsecured signature loans. Current rates on a personal loan are as low as 3.24% APR.
Based on the applicant’s creditworthiness, unsecured personal loans are usually extended with fixed rates.
Variable rate vs. balloon payment loans
In addition to fixed-rate boat loans, consumers can also choose variable-rate or balloon-payment loans. A variable-rate lender may extend a low introductory rate on their loan product that adjusts following the initial rate period. These loans reset according to interest rate indexes, so borrowers need to ensure that they can afford monthly payments after the attractive introductory rate expires.
With a balloon payment loan, borrowers agree to pay off the balance on a specified date. The NMMA advises that balloon-payment loans may be best suited for borrowers that intend to own the boat a short while and sell it off prior to the due date of the balloon payment.
PART II: Shopping for Your Boat Loan
Credit score and credit history are the key variables lenders examine when it comes to approving an affordable boat loan. Don’t sail into the application process blindly. Is your credit good enough to land a favorable interest rate and term? Should you improve your credit score prior to searching for financing?
Know your credit score
Credit scores directly impact loan approvals and rates in a similar way that they affect home mortgages and car loans. Good credit scores are considered optimal for securing a boat loan at a favorable rate. You can check your credit score for free using the Discover Scorecard.
The credit-reporting firm Experian defines an “excellent credit score” as 750 or higher. Boat lender Lifestream offers loans to excellent credit applicants with rates from 3.24 percent to 10.59 percent.
Bad credit will severely impact the interest rates on a boat loan, although there are mid-tier credit and subprime loans available. Applicants with credit scores in the 500-550 range can anticipate rates from 10 to 20 percent, according Coburn.
Know how much boat can you afford
The National Marine Manufacturers Association (NMMA), an organization that represents more than 80 percent of today’s boat and marine engine makers, recommends that new owners consider more than the asking price of the watercraft. Consider costs for insurance, equipment upgrades, maintenance, and storage as well.
A good way to begin assessing the affordability is to use the free NMMA Boat Loan Calculator or LendingTree’s free Boat Loan Calculator [Disclaimer: MagnifyMoney is a subsidiary of LendingTree]. Enter the loan amount (sans the down payment), the interest rate and the length of the term. The calculator will crunch the numbers and estimate the monthly payment on the loan. Compare the monthly payment to your income and financial cushion.
One way to constrain the monthly payments is to alter the term or the down payment. A longer term may make monthly payments more affordable, but the total price of the loan will increase accordingly. The size of the down payment can also reduce the monthly payments. Consider the size of a down payment you can make without toppling your finances.
How to get pre-approved for your boat loan
Getting a pre-approval for a boat loan is a solid way of determining the ceiling of your budget. The pre-approval (or pre-qualification) process for a boat loan is similar to other types of loans. The lender does not have to look at the prospective boat contract. The underwriter calculates the amount the applicant can spend based on the loan amount and allows consumers to go boat shopping knowing their limits.
Once the lender grants a pre-approval, the shopper has more leverage with the dealer, who knows the buyer can afford the boat and is ready to buy if it meets their requirements. A pre-approval can provide a hedge against unfair seller mark-ups or long delays in waiting for the loan to go through.
Pre-approvals are acceptable during a specific time frame, typically up to 60 days.
New vs. used boat loans
There’s an age-old argument over whether buying a new or used boat makes more sense. Financing options are much the same for each. Banks, credit unions and dealers can help buyers into fixed-rate collateral, home equity and personal loans to pay for the watercraft. Buying a used boat may be a good option for first-time owners who want to decide on the kind of watercraft they’re after and whether they will use it enough to justify the expense. The NMMA cites the benefits of buying new vs used, which we’ve summarized below:
In purchasing a new boat, there’s no reason to consider depreciation, wear and tear, and why the boat was put up for sale in the first place. New boats often come with warranties to cover repairs at local dealers. And owners can outfit their new watercraft with exactly the features they need.
A marine survey can detect any or all items of concern with a used boat on the market. Buying a boat that’s five years old can stave off much of the depreciation. The NMMA reports that in buying a used boat, the new owner avoids the “25 to 33 percent depreciation” that occurs in the initial five years.
Where to shop for your loan
Boat loans are made by banks and credit unions, boat dealerships and financial service companies and consumers may benefit by comparison shopping among lenders. Each type of lender source comes with a unique set of considerations.
Banks and credit unions
Banks and credit unions may offer the widest selection of options for boat loans, from personal loans and home-equity products to collateral loans. They may also be more lenient on credit scores than other lenders. On the negative side, many of the largest banks in the country do not offer boat loans. The formal application procedure of traditional lenders can take longer than it does for online institutions. It’s wise to compare interest rates as well when it comes to bricks-and-mortar institutions vs. online lenders.
One plus of working with a dealership is that it may be able to offer discounts or rebate programs provided by manufacturers. The NMLA claims that specialized marine lenders can approve a loan in as little as “a few hours”.
Dealer-lenders may also allow financing that includes funds for electronics, navigation gear and extended warranties. On the downside, consumers may be restricted to the type of loan product offered by the dealer, rather than the wider options offered by banks or other lenders.
Like car buyers, boat customers should try to negotiate prices from dealers based on their own price research. “[Negotiating with dealerships] is occurring more and more in recent years,” Coburn says.
Financial service companies
Whereas banks and credit unions are savings and loan institutions, financial service companies just offer loans. NMLA membership is made of banks and credit unions, but also of major financial service companies offering financing on new and used boats. The NMLA claims its members provide applicants with faster credit decisions, longer financing terms and specialized help in securing used boat loans. A potential downside of some financial service companies lies in the variation of loan rates and terms based on location. They are licensed by the states in which they do business. However, financial service companies are regulated by The Consumer Financial Protection Bureau (CFPB).
What to expect on a boat loan application
Lenders establish their own guidelines for underwriting a boat loan. Depending on the type of loan, the lender and the total loan amount, applications may be made in person, online or over the telephone. Borrowers must give verbal (for telephone applications) or written authorization for the lender to pull a credit report. Be prepared to offer thorough information about the borrower, any cosigners and details about the boat. A customary application includes:
- Borrower’s name and address (owner or renter)
- Driver’s license
- Employment status and proof of income (may require immediate past two years of tax returns)
- Financial assets and liabilities (cash on-hand, investments, outstanding debt and other loans)
Cosigner (for personal loans or with boat dealers accepting co-signers)
- Name and address
- Monthly house payment
- Driver’s license
- Employment status and proof of income
- Manufacturer, model and year
- Length and hull number
- Engine make/horsepower (if applicable)
- Optional equipment
- Intended use (pleasure, residence or charter)
- Years of boat experience and/or previous ownership
- Total cost to finance (price, sales tax, title and registration)
Part III: Understanding Your Boat Loan Contract
The Boat Owners Association of The United States (BoatUS), representing half a million members, recommends borrowers scrutinize potential sales contracts carefully since they are legally binding. A contract may only consist of written terms and agreements on a sheet of paper (for private sales) or a lengthy legal document prepared by attorneys representing a dealership. Here are key items commonly included in the sales agreement:
Manufacturer’s Statement of Origin or a listing of the boat and engine, hull-identification number (HIN), complete listing of all equipment. It should also provide a seller’s statement that the boat has no existing liens and encumbrances.
Listing of the purchase price including any down payments and/or trade-in credit.
For buyers without pre-approval on a loan, the contract should spell out contingencies that can include the buyer’s ability to secure financing and insurance. Other contingencies affecting the sale may call for satisfactory findings through a formal marine survey.
Watercraft condition on delivery
The seller should itemize all the features of the boat upon delivery. For a used boat, the seller should itemize add-on equipment/gear and remedies for any shortcomings that are discovered during the marine survey. Who is responsible for amending the condition: seller or buyer?
The contract should set a delivery date and location upon completion of the sale.
Warranties or service plans
BoatUS recommends that the contract stipulate warranties on new boats or service contracts for used watercraft. Buyers should be meticulous in examining the details on the boat condition if there is no warranty and it is sold “as-is”.
Watch out for boat loan scams
Charles Fort, director of the BoatUS Consumer Protection Bureau, the nation’s largest organization representing recreational boaters, identifies red flags that indicate the seller may be engaged in a scam. Many scams, he says, are represented by bold-face lies and delivered via email.
Common red flags include:
- Abysmal use of grammar and poor spelling
- Vague language that doesn’t identify the boat for sale (current location and HIN number)
- Absence of other forms of contacting the seller (especially no personal or business address)
- Offer to sell the boat located abroad or nationally without offering an inspection
- Request for payment via Western Union, PayPal, or MoneyGram
- Request for a long-distance purchase secured by payments via a fictitious escrow service
Boat Financing FAQs
Daylong or vacation boat rentals are easy. Long-term boat leasing is offered by dealerships, boat charter clubs and through shared-leasing businesses. But leasing a watercraft over the long term can be costly since consumers rarely enjoy rate reductions based on boat depreciation.
Depending on the lender, using a cosigner can be advantageous if the buyer has less than good credit. Read about cosigner’s obligations at the Federal Trade Commission.
Live-aboard boats are financed through boat loans. If the craft is stationary and is not self-propelled, it can be considered a houseboat, requiring its own form of marine loan. Learn more about houseboat financing.
Dealers and lenders can include the cost of maintenance, liability insurance, electronics and specialized gear in the total loan amount.
Lenders base loan amounts on variables including income, credit and type of craft. Essex Credit, for example, has a $10,000 loan minimum on pleasure boats and $25,000 minimum on a live-aboard craft. Essex maximums are $5 million. At LendingTree, loan amounts range from $1,000 to no upper limit.
One score does not fit all. Better rates, lower down payments and affordable loans typically go to applicants with at least a 690 FICO score. A high credit score is not a requirement for all lenders. According to Coburn, people with scores from 500-550 can receive subprime loans strapped to a 12-19-percent interest rate.
Comparing rates and terms from multiple lenders is one way to find an affordable boat loan. The age of the boat also affects the cost of the loan. For instance, Essex publishes online rates for boats manufactured from 2007 to current models. For financing boats older than 2007, buyers need to contact the lender. Applicants can negotiate for the best cost for a loan by considering shorter terms that typically come with lower rates. At LendingTree, buyers can receive free competitive bids for new and used boats, or for refinancing.