If you dream of sunny days spent captaining a boat of your own, you may also be wondering how to finance a boat. With more than 12 million registered boats in the U.S., you are not alone. Boat loans make it possible for many boat owners to purchase vessels they could not otherwise afford.
What is a boat loan?
A boat loan allows you to borrow money to finance a new or used boat. Those funds are typically paid back in monthly payments.
How do boat loans work?
Learning how to finance a boat is easy if you have ever financed a car, because the process is similar. Some lenders require a down payment of between 10% to 20%. Certain lenders allow you to tack extras — like life jackets and other safety gear — onto the loan.
The loan will either be secured or unsecured, although boat loans are usually secured. In a secured loan, the boat you finance acts as collateral. While the lender will generally offer a lower interest rate for a loan with collateral, they also have a legal right to repossess it if you miss payments. There are also unsecured boat loans, which we will discuss a bit later.
Boat financing is serious business. Boat loans can stretch up to 20 years, and the decision to commit to a loan that long can have a long-lasting impact on your personal finances.
What financing options are available for boats?
Here are some of the ways you can finance your boat:
Bank or credit union: If you’re comfortable with your current bank or credit union, it makes sense to learn what they have to offer in the way of boat loans. Once approved, the lender will either give you a check for the amount financed or send it directly to the dealer. Boat loans through banks and credit unions are secured, with the boat serving as collateral.
Marine financing: If you shop for a boat through a dealership, your dealer should know how to finance a boat and tell you about marine financing. The National Marine Lenders Association lists qualified lenders (normally based on their experience with boat financing). While rate shopping, make sure to ask your dealer which marine lender it recommends. Like banks and credit unions, marine lenders consider the boat as collateral.
Online lenders: You will find that the interest rates charged on personal loans vary widely, as do repayment terms. Some personal loans are secured, but many of the best personal loans are unsecured. The interest rate on an unsecured loan is likely to be higher and the repayment term shorter because you haven’t put up any collateral. However, your boat will not be repossessed if you miss payments. That said, missing payments on any loan is bad for your credit and should be avoided.
Individual seller financing: As popular as boating is, there is a saying that holds water for some. It goes like this: “The two happiest days in a sailors’ life are the day he buys his boat, and the day he sells it.” That’s because boats can be expensive to operate and store. They can also be a hassle to repair, especially if you are not mechanical. Sometimes, to rid themselves of a boat, a seller offers to finance it. If you go this route, make sure the seller is charging a competitive price and interest rate. Do not be surprised if a seller wants to run a credit check to make sure you are good for the payments. You can also count on signing a purchase agreement.
How to finance a boat
Financing a boat is a straightforward process. Here’s how it works:
Check your credit score: The higher your score, the better the interest rate and repayment terms you will be offered. Before you do anything else, check your credit score and order a copy of your credit report. If it’s low, take steps to raise your credit score. For example, try to pay down credit card debt and make sure there are no errors on your credit report.
Decide how much you want to borrow: Monthly loan payments are not the only cost of owning a boat. You will also pay for boat insurance, maintenance costs (which can add up quickly), winter storage (depending on where you live), dock rental, and a way to tow the vessel. Make sure your budget includes all the necessary expenses.
Shop for the best boat: Shop for the boat you want at a price you can afford. Don’t forget you’ll need to make a down payment of 10% or 20%.
Rate shop: Once you find the perfect boat, it’s time to rate shop lenders. Remember that interest rates only tell part of the story — instead look at the APR which includes interest, fees, and other charges. Be aware that potential lenders will do a hard credit inquiry, which dings your credit score slightly. The good news is that credit scoring agencies count all credit applications for a single type of purchase in a short timeframe as a single inquiry. So try to do your rate shopping within a two-week period.
Decide on a lender: Once you’ve determined which lender offers the lowest APR and best repayment terms, accept their offer, sign a loan agreement, and make your first payment approximately one month later.
Alternatives to boat financing
Paying cash for a boat ticks a couple of “smart money move” boxes. By not taking on debt, you avoid the interest costs, monthly payments, and increased debt-to-income ratio (DTI) that come with it. Plus it offers the satisfaction of knowing that you own the boat outright and no one can take it away.
While you’re waiting to buy a boat of your own, visit a local marina and rent a boat by the hour or day. Not only will you get to spend time on the water, but you will learn more about boat operation, and may even change your mind about the type of boat you want to purchase. Best of all, you will have all the fun without any of the headaches associated with boat ownership.
Understanding the ins and outs of boat loans is a good move. That way, when the time comes to decide on boat financing, you will be able to make decisions with your head rather than your sea-loving heart.