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How to Get a Boat Loan: Smart Steps to Choose One That’s Right for You
It’s that time of the year when you move to the shores, pack your boat and wait for the next summer to arrive. But not yet, buddy. Not when you're looking to buy your new dream boat.
In fact, the end of a boating season is one of the most exciting times for anyone in search of a new boat. The reason? Boat sales.
If you're a first-time buyer, however, you might wonder how exactly to secure a boat loan to land that gorgeous boat that stole your heart. But don’t worry, because I've got you covered.
Read on to learn about all the essential aspects of getting a boat loan and buying a boat.
Steps to Take Before Applying for a Boat Loan
Assuming you have a fair idea of the boat market and your affordability limit, here are a few steps to take before applying for a boat loan.
Step #1 — Pre qualify for a boat loan
Visit a bank and check how much you can expect as a loan. Tell them you're looking to buy a boat and need a loan for the same.
Ask them how much they're willing to lend and how much of the boat’s value that will cover. Remember, a boat’s "value" and "asking price" are often two different numbers.
Several factors contribute to a boat’s true worth. For example, accessories - both original accessories and add-on's such as tow bars and live wells - add to the boat's base value. You need to factor these in so the bank can accurately determine the boat’s value.
Step #2 — Select your boat (and boat accessories)
Once you have a fair idea about the loan amount you're qualified to receive, you need to find the boat that’s perfect for you. This requires a little bit of legwork and time.
Hitting a boat show might be a good idea. Boat shows not only give you a peek at many options available, but they can also land you good deals.
Alternatively, you can take down the prices at the boat show and, later on, visit the dealers to negotiate a lower price.
Whatever way you wish to go, always remember to take down each model's details that you'll finally shortlist. And by details, I mean every little bit, such as identifying numbers, model number, the trailer length (if it has one), whether it's galvanized or painted, spare parts such as fenders, anchors and steps, and even all the accessories included in the deal.
Step #3 — Learn about types of boat loans
Before you actually go out and apply for a boat loan, invest some time to learn about the various options available. Boat loans are primarily of three types, each one with advantages and disadvantages. Here’s a quick rundown of them.
Collateral Loan
If you've taken a loan for a car, you probably understand this loan type. A collateral loan in the context of a boat is where your boat acts as your collateral.
In other words, if you fail to pay the loan back, the lender has the right to take away your boat to make up for the loss. With this type of loan, your credit score plays a vital role in determining the interest rate you'll be handed down.
Also, you'll need to put down 10 - 25% of the boat’s purchase price.
Home Equity Loan
In this type of loan, you can get credit against your home (if it has good equity). However, this also means your home becomes the collateral and, in case of any default, the lender has the right to foreclose your home.
Also, to get a home equity loan, you need to pay for a home appraisal and closing costs. On the brighter side, payments on this type of loan are usually tax deductible.
Unsecured Personal Loan
A robust credit score can qualify you for a personal loan, which you can use in any way you deem fit. The best part is that it's not backed by any collateral. In other words, even if you default, the lender has no control over your boat or home.
What a default would cost... is your credit score. However, since you're not putting any collateral out there, an unsecured personal loan demands a higher interest rate.
Now, that's something to consider before settling on any one boat loan type, which brings us to the next step:
Step #4 — Learn about interest rates
Just like the various types of boat loan options, you also choose from a number of alternatives in case of the payable interest rates.
Fixed Interest Rate
With this type, as the name suggests, you pay a certain fixed rate of interest every month, throughout the loan tenure. This also happens to be the simplest and most common interest type.
Once you're done making all the payments, you can celebrate and "burn the mortgage."
Variable Interest Rate
Unlike fixed interest loan types, the interest rates here vary and depend on a number of factors. One such factor is the prime rate (or LIBOR rate in the EU).
There's also no fixed "time" when the interest rate would change. In other words, they can change daily or at some point in the future, which may be months or years away.
Usually, the initial rate of interest is valid for a certain period of time and then resets. Before you jump in, you'll need to put together all the details about the adjustable period so you have a fair idea of how much change in the rate you're looking at and how to manage them.
Balloon Payment Loan
People who know they want to own their boat for a certain time period, say three years, usually go this route. In a balloon payment loan, you'll have to pay the entire balance at the end of a pre-decided term.
It's called "balloon" because of the large payment portions made. On the bright side, this type of loan is usually for a short time period.
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Step #5 — Learn about the loan sources
Just so you know, banks are not the single source to find a boat loan. And it does make a lot of sense to know what your reliable options are so you can compare rates and terms to select one that’s best suited for you.
Banks
Not all banks offer loans for boats, but many who are members of the National Marine Lenders Association will.
Start with your bank to see if they finance a boat purchase. Have the boat details handy so you can talk about rates and loan terms they're ready to offer for that particular boat.
One good tip: keep an eye on boating magazines and publications (since many banks advertise there).
Credit Unions
Being a member of a credit union that gives boat loans may score you some extra brownie points. Why? Because credit unions often offer competitive rates to their members.
Financial Service Companies
These companies make an excellent choice while taking a boat loan. This is because of their association with many local, regional and national lenders.
Working with financial service companies gives you a bigger ground to play in. And that can only be a good thing.
Other Check-Offs to Keep in Mind
Having a fair idea about credit sources and expected interest rate are, without a doubt, indispensable parts of knowing how to get a boat loan. But they're clearly not all.
Here are a few more check-offs to keep in mind.
Look beyond the advertised interest rates
A low-interest rate given in the ads doesn't necessarily translate into an attractive deal. Take a closer look at the term period, at the number of years that "low" rate is valid for and other fine print details.
Try to get a pre-approval
This will save you a lot of time. See if you can at least start the underwriting process. Even before you have signed the sales agreement.
Check out tax benefits
A boat with a berth, head and galley can qualify as a second home. So, depending on the type of boat you're planning to buy, you might get a second-home loan interest deduction. It's something worth considering!
Learn about the closing costs
Just like any other loan, a boat loan also involves payments other than the interest or the principal sum. This includes sales tax, processing fees, title fees and registration fees. Factor in how much these "extra" fees will cost you.
Consider your monthly payment
It's also important to know how much money to pay your lender every month. Check out one of the free loan calculators online to get an idea.