A boat loan is sort of like an auto loan; so, how do boat loans work? You get it from a bank, credit union, or online lender to finance your boat and then repay it in installments.
The size and interest rate of your loan will depend on several factors, including your lender, annual income,
credit score, loan size, and whether you are taking a secured or unsecured loan.
Undoubtedly the biggest difference between a boat loan and an auto loan is how loan providers classify the two.
While cars are regarded as necessary land vehicles, boats are considered to be luxury vehicles, meaning that they are not necessary.
The quandary is that some people actually rely on their boat as part of their livelihood, making it pretty necessary.
How Do Boat Loans Work? Types of Boat Loans
Boat loans can be grouped into two main categories: secured and unsecured loans.
Your lending organization and your financial history will dictate the type and rate of loan available to you. In some cases, you may only be eligible for secured loans.
As such, it is important to familiarize yourself with the different types of boat loans before you start the application process.
i) Secured boat loans
In a secured loan, you provide some type of collateral to serve as backup for the loan being given to you.
In case you fail to honor your loan commitment, the lender will use the collateral (ideally something valuable) to recoup the money lent to you.
Common examples of collateral items include a vehicle, home, and even a savings account.
The best thing about secured loans is the fact that there is collateral involved,
so they usually come with relatively low interest rates because the lender is also taking on a much lower risk.
What’s more, borrowers can access the loans even if they do not have the best credit history.
ii) Unsecured boat loans
You don’t have to present any collateral when applying for an unsecured boat loan, but there is a catch.
For starters, unsecured loans have way more restrictions than secured loans. Secondly, lenders who offer these types of loans usually require a thorough application process.
iii) Personal loan
A personal loan is an excellent option if you have a reliable income and a good credit score.
This is because personal loans typically have extremely competitive interest rates and very flexible repayment terms.
You can decide to pay off the entire loan early or make extra payments that all go toward the principal.
Once the lender approves and funds your loan request, the money is sent to your bank account from where you can then start to negotiate with the boat dealer.
You can usually get an unsecured personal loan with a low interest rate to finance your boat, if you have a good credit score.
The quandary is that while a personal loan does not typically come with the risk of your boat being repossessed, failure to honor your loan repayments.
Where to Apply For a Boat Loan
You can get a boat loan from a number of institutions such as online lenders, credit unions, and banks.
Your local or national bank can offer you a boat loan to finance your boat. Check with your bank to find out whether they offer personal, auto, or boat loans that you can use.
2. Credit unions
Credit unions offer various financial products like saving accounts, checking accounts, and even loans.
The upside is that credit unions are not for-profit financial organizations,
so they usually offer relatively low interest rates even if your credit score does not meet the requirements of a traditional bank loan.
You need to apply for membership for you to take out a loan with a credit union.
Different credit unions have different membership requirements, which may include working for a specific company or living in a certain county.
3. Online lenders
An online lender is a good option if you often bank digitally.
There are many online lenders who offer boat loans specifically, and there are others who only give out personal or recreational vehicle loans that you can use to finance your boat.
Steps on How to Get a Boat Loan
1. Use a boat loan calculator
How exactly will you repay the money once you get your boat loan? A great tool to use to determine how to make your monthly repayments is a boat loan calculator.
Of course, the lender will also consider other factors such as your net worth, debt ratios, and credit scores,
more or less depending on the term and size of the loan as well as your personal circumstances. Generally, however, the following hold true for most boat loans:
- Most lenders generally look for credit scores of at least 700. A lower credit score may get you a loan, but it may come at the cost of paying either a larger down payment or higher interest rate.
- In most cases, you can factor the expenses of accessories such as extended warranties, trailers, and electronics into your boat loan, as long as you select the complete package you need beforehand.
- Lenders usually base boat loans on a down payment of ten to twenty percent. However, there are some lenders who offer deals without a down payment, if you look hard enough.
- You can typically stretch a higher loan over long periods, usually from 4 to 20 years.
- Interest rates are generally directly proportional to the terms of your loan: as the loan terms go down, interest rates also go down.
- Interest rates are usually indirectly proportional to the loan amount: i.e. the higher the loan amount, the lower the interest rates.
2. Check your credit
Check your credit using all the tools at your disposal to find out if you qualify for a boat loan.
You can do this online, whether it is through your credit card account, bank, or other website that allows you to see your credit score for free.
You can also check your credit reports without paying anything at AnnualCreditReport.com.
3. Clean up your credit
If you believe there are errors after reviewing your credit score and credit report, you can file a claim with the credit bureau.
You should also use this opportunity to clear up any unpaid balances or debts that may be hurting your credit score.
It is a good idea to improve your credit score before applying for a loan as it can help you access more favorable terms like lower interest rates.
4. Learn about interest rates
Like with other types of loans, you have a number of options when it comes to payable interest rates on your boat loan.
i) Fixed interest rate
Fixed interest rate means that you pay a certain fixed amount on a monthly basis until you finish repaying the loan. As it happens, this is also the simplest and most common type of interest rate.
ii) Variable interest rate
With variable interest rate, the amount you pay will depend on several factors (most notably prime rate). What’s more, there is no particular time when the rate is scheduled to change:
It can change everyday or at some time in the future. The lender will typically give you an initial interest rate that is valid for a certain period before it resets.
However, it is important to research everything you need to know about the adjustable period to get a good idea of how the rates may change over time and how to manage them.
iii) Balloon payment loan
People usually use this option when they only want to own the boat for a specific period, like three years.
The main benefit of balloon payment loans is that the loan is normally designed for short term. However, you have to pay the whole balance after a pre-determined period.
5. Get prequalified
Make sure you can afford the boat you are planning to finance with your boat loan. Consider the actual cost of owning the boat.
You may be looking to buy a 300-foot mega yacht while in reality you can only comfortably afford a 42-foot boat.
Apart from the cost of repaying the loan, there are other costs to consider like taxes, registration, slip fees, storage, fuel, insurance, and maintenance, among others.
You may also need to consider the issue of getting a marine survey, especially if you are planning to purchase a pre-owned boat.
In most cases, however, the dealer is expected to have already examined the boat thoroughly before it gets to the buyer.
Your liquidity and debt-to-income ratio will play a major part when it comes to getting prequalified for your boat loan.
Lenders will use your debt-to-income ratio to assess the percentage of your monthly gross income that goes toward paying other debts.
If your debt-to-income ratio is relatively high, you are considered to be a risky borrower.
Liquidity, on the other hand, shows how much money (or assets that can be quickly converted into money) you have.
This information is important to lenders because it gives them assurance that they can continue getting their payments for a certain period of time in case you are unable to do so because of income loss.
If your liquidity or cash reserves is not enough to cover your loan repayment for more than a couple of months after loss of income, many lenders will be hesitant to approve your boat loan.
The lender will usually start by checking your credit score to determine the interest rate on the loan,
and then adjust accordingly depending on the size and terms of the loan and your down payment. The interest rate can move up or down based on how you modify these factors.
For instance, if you shorten the length of your loan or put down more money, you may get a slightly lower interest rate.
Every situation is unique, but you generally have to provide more documentation (e.g., proof of liquidity, proof of income, and tax returns) for loans over $150,000.
Smaller loans do not necessarily require a lot of documentation, but you should always be prepared to provide such items in the event they are needed.
The bank may also need to see your business tax returns if you own a business or are self-employed in order to verify the reliability of your income.
Once you provide all the paperwork, you should be approved within a few days.
Tips on How to Get a Boat Loan
Before you set out to get a boat loan, you first need to identify the boat you want and its price. Then research the boat insurance that suits you and initiate the purchase.
i) Talk to your boat dealer about financing
Boat dealers can be a good source of information when it comes to looking for a boat loan.
They arrange boat loans regularly so they have established contact with lenders already, and it is in their best interest to make the transaction happen. They can also help recommend a good insurance company.
ii) Consult your bank
If you have enough equity in your home, it may be advantageous to take out a second mortgage or a home equity loan for tax purposes or simply to get a lower interest rate.
iii) Consult a marine financing lender
There are some lenders who deal specifically in providing boat loans. Check out the National Marine Lenders Association, an organization that consists of lenders who specialize in boat loans.
iv) Consider HELOC (home equity line of credit)
With a home equity line of credit, you can borrow a certain amount of money using your home’s equity as collateral.
This is a great option especially for financing a used boat, if you own a home, as a lender can lend you up to 85 percent of your home equity value.
A home equity loan calculator is a great way to determine how much you can get on your home when you are looking to get a boat loan.
FAQs on Boat Loans
How long is a typical boat loan?
The average loan repayment time for a typical boat loan is 8 to 12 years. However, a small loan can have a short loan repayment period of as low as 60 months while the repayment period of a big loan can range from 12 to 15 years.
How much does it cost to insure a new boat?
The average cost of boat insurance is typically $200 to $500 a year, depending on the type and size of the boat. Insurance on a relatively big or expensive boat can cost about 1 to 5 percent of the boat’s total value.
The type of boat loan you get ultimately depends on whether you are looking for a new or used boat. Some lenders can finance a boat even if it is as old as 30 years,
but you should generally expect to pay a higher interest rate and sometimes higher down payment for an old boat as compared to a newer one.