Financing Your Dream Boat

We've all heard the stories. Lucky boaters with miraculously deep pockets during the economic downturn, who snapped up $700,000 floating palaces in default for $300,000, cash. For most of us thinking of dipping toes in the waters of a still-struggling boat market, that kind of money is fantasyland, and we'll have to look at financing to fuel our passions.

First, A Little Background

Much like the housing market, before the recession hit, things had gotten a little crazy in boat buying. "Boat loans are 'luxury-good' loans, so it was different from a mortgage or even a car loan in that sense," says Don Parkhurst, senior vice president of the marine and RV division at SunTrust Bank, and someone who's been in the business for 34 years, through several recessions. "But there was some sub-prime lending creeping in, and down payments of 10 percent or less, in some cases, were starting to become more common. It amounts to imprudent sloppy lending, really, but it was a factor of competition rather than laziness on the part of the banks. Then, during the recession, we saw boat values across the board dropping 35 percent. That meant that almost everyone, even if they'd made a sizable down payment, had a loan value greater than the value of the boat, similar to the home mortgages."

Unlike the stock and housing markets, which have rebounded considerably, the value of boats has not. "And they probably won't," adds Parkhurst, who bases his opinion on previous recessions where we've had big drops in boat values. "That loss in boater equity has affected the whole industry," he says. "It's difficult to sell your boat if you've got to bring cash to the table, and it means you don't have equity to do a trade-in to buy a new boat. So boat sales are coming off the bottom slowly, only growing about five percent a year. Plus, people came out of the recession afraid of debt, and they're more conservative about spending their money. They want to build up their cash first."

This is all common sense, of course, but there is a silver lining emerging. It's still a great time to buy a boat, according to industry experts who say rates are low and there's still inventory. More importantly, the banks have started lending again. For a qualified buyer, there's always been money available, say experts who note that the shortage was in qualified buyers. Downpayments have also eased off from 20 percent at the height of the downturn, to 15 percent in some cases, depending on the type of boat.

The Crystal Ball Of Boat Financing

Things may start to change in the next couple of years, according to Parkhurst, not least of all because more people are coming back into the market. "There are people who didn't go bankrupt, but got into a little bit of trouble and got late on payments. That stays on their credit history for seven years, so by 2015 and 2016 it will have dropped off, and it'll be easier for them to get a loan."

The second big shift may be toward smaller boats as they become more and more popular. "There's some evidence to show that smaller boats are selling better this year and larger-boat sales are lagging," says Parkhurst. "There are certainly lots of people who want to boat, but they're more sensitive to the costs surrounding it. Hopefully as the economy strengthens and confidences go up, boat sales will go up, too. The reality is about one-third of the manufacturers and probably about a third of the dealers went out of business during the recession, so the market is a lot smaller than it was pre-recession. I think the manufacturers who made it through realize they've got to build a more affordable boat going forward. Instead of trying to put all the bells and whistles into the boats, they're much more focused today on affordability."

The Stepping Stones To Financing

If you're looking to buy a different boat, and you don't have a boat loan now, what should you do to get financing for your new dream boat?

Credit Check

The first order of business is to get your credit in order. Just as with any other loan, the closer your credit score is to 700 and higher, the better the rate you'll get.

Get Pre-Approved

As with a home loan, you can get your paperwork together now to make sure you're at the top of the queue when you find the boat you want.

Boat Loan Basic

As with real-estate loans, there are many options. A fixed-rate, fixed-term, simple-interest loan is the most common, with the same monthly payment for the life of the loan, and probably the best option as long as rates remain low.

Forever Young

It's harder to get good rates, or any financing at all, on older boats. That 30-year-old wooden dock queen might look like a diamond in the rough to you, but it probably won't to your lender. "In the early '80s, the longest term you could get on a boat loan was about 15 years," says Parkhurst. "Most banks won't offer more than 20 years. On smaller boats you can't get that long of a loan, but on larger [more expensive] boats, you can. For most banks you'd need to borrow at least $75,000 to get a loan of that length. So, if you're borrowing less money, it would probably be a shorter term. Not just on new boats. You can get 20 years on a used boat as long as it's within 15 model years, but that varies a lot with banks."

Don't Be Fooled By The Ads

You may see rates advertised as low as 3.99 percent, but there usually will be some small print that makes that loan less attractive. The loan period might be only seven years, for instance, or not valid on boats over five years old.

To HELOC, Or Not?

Thinking of using a home-equity line of credit (HELOC) set to prime to buy your boat? This might work if you have equity in your home, and you plan to pay the boat off while interest rates remain low. But, Parkhurst says, "many people don't have equity in their homes anymore."

Your Boat As A Second Home

A boat can qualify as a second-home interest deduction if it has a berth, head, and galley. So buying a boat just large enough to have these features could offer a tax advantage. There's an overall limitation on the second-home deduction; you can only deduct two homes, and it can't be more than $1 million in loans. If you count the HELOC, it's $1.1 million.

Don't Count Your Chickens Too Early

So you've secured the loan and found the boat you've wanted. Hang on. An unexpected outcome of the downturn is sales falling through at survey, because the boats were not well-maintained. A person with financial problems tends to realize they're having them one or two years out, and while they might be making payments, they're not winterizing or maintaining the boat, or using it because gas is expensive. Generally the boat is in one place, the buyer's in another, and the financer is in a third. The financers report that they'll often get a call from someone saying they're flying down to look at a boat in Fort Lauderdale, for instance, and they're pretty sure they'll be putting an offer on it, but then when they see it, it's not what they thought it would be.

Dealer Financing?

For a smaller loan, under $25,000, the dealer-financed loan may be the way to go. Generally, the smaller loans are done on the indirect dealer-finance model. Be aware, though, that some dealers make more on financing than on the boat deal, so before signing on, compare rates and extras in closing costs against what you can get from a lender.

Moving On Up

No matter how good your credit score is, if you have a boat loan, most banks may give you a pre-approval for a loan, but they won't let you apply for another one while you still own the first one. In other words, you'll need to sell your current boat and pay off the loan on it before a lender will approve the loan on your new boat.

Refinancing For A Better Rate On Your Current Loan

It's not all gloom and doom because refinancing may be available to you at good rates. BoatUS and some other lenders may offer you a better rate on your current loan, with the same terms as if you were starting a new loan. See BoatUS.com/Boat-Loans

What Are The Typical Closing Costs?

As with any loan, there are some involved, but they vary. Check with your lender as to theirs.

Calculating Your Monthly Payment

Wondering how much of a loan you can afford? See our online calculators to compute monthly payments. Your lender will also review your debt ratio and other criteria. BoatUS.com/Boat-Loans