How to Finance a Boat Purchase

How To Finance a Boat Purchase: Boat Loans Explained

by Spero Financial

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With warmer weather comes more time outdoors, and for those who have access to waterways, the desire to own a boat increases. But when it comes to buying a boat, what do you need to know? In this post, we’ll explore all the aspects of boat loans and what it takes to sail home on your very own watercraft.

Should you buy a boat?

To determine if boat ownership is right for you, you should first identify what kind of boat would suit your lifestyle best. Also, determine how often you’ll use it and how you will store and maintain it. Consider a few things, first:

1. Frequency of Use

How much will you actually use a boat? Do you currently hit the water just a few times a year, or are you there as often as possible? Do you enjoy or miss any water activities — like fishing, tubing or water skiing — that a boat would allow you to enjoy on a deeper level? If not, or if you only go to the water a few times a year, you may want to consider renting or borrowing a boat instead.

2. Type of Use

What kind of boat are you looking to buy? Do you want a pontoon that can host a party of people? Or are you considering a fishing boat that can go out over open water? A boat’s utility will often determine how much and how often you’ll use it, but the type of boat you want to purchase will also dictate the costs you might incur.

3. Maintenance and Storage

Storing a boat in the off-season can require a bit of effort and generate some additional costs — are you ready for them? Depending on what kind of boat you choose, you might need an extra garage, an all-weather boat cover, or a private slip. These add-ons can be expensive, and each would factor into whether you will be able to care for a boat after you buy one.

What does owning a boat actually cost?

Should you choose to move forward and purchase a boat, you need to look at the true cost of ownership, not just the sale price. That actual cost of boat ownership includes the following ongoing costs:

  • Registration/Taxes (South Carolina requires three-year registration as well as 10.5% annual property tax on all watercraft if it’s in the state for more than 180 days)
  • Insurance
  • Mooring or dock fees
  • Transport trailer
  • Off-season storage
  • Lifejackets and safety equipment
  • Maintenance
  • Gasoline (If you buy a sailboat, you can skip the gas; for engine-powered boats, you’ll need to consider this ongoing cost.)

With all of this in mind, a $20,000 boat won’t just cost you that amount; you’re also looking at about $6,000-8,000 a year in additional costs. And remember, just like cars, boats depreciate over time. Eventually, you will need to weigh maintenance costs versus your boat’s overall value.

How do boat loans work?

If you’ve ever bought a car, there’s good news: buying a boat isn’t that different of an experience, although boats often come with a much higher price tag than your standard sedan or SUV. But generally, a boat loan is very similar in structure to an auto loan. Both take the same information into account for a purchase: your net worth, your credit rating (shoot for upper 600s or higher), income stability, and debt-to-income ratios. Your credit union will generally require a down payment (usually between 10 and 20 percent), and you can often roll the “extras” (warranty, safety gear, etc.) into the full loan cost.

Also, the higher loan amounts can usually be stretched over a more extended period, with the average boat loan term ranging anywhere from 4-20 years. Larger boats or boats with a higher price tag will often have a lower interest rate and may include a longer loan term.

Generally, boat loans are considered either secured (backed by some sort of collateral) or unsecured (not tied to any form of property or collateral). In a secured loan, the terms of repayment are likely much better, because the financier knows that if the loan is defaulted, they can take the collateral as repayment. In contrast, they may see an unsecured loan as much riskier, which are very likely to show in the interest rates and repayment schedule.

Typical Terms for Buying a Boat

While financing a boat purchase can mean a different bottom line or a different monthly payment from person to person, there are some standard terms that you can expect to see.

Length of Repayment

Oftentimes, how long you have to repay a boat loan is based on the type of loan you have taken out. A secured boat loan, due to its nature and collateral-based backing, typically has a longer repayment schedule—often up to 20 years. However, an unsecured loan is likely to have much shorter repayment terms, often requiring full repayment between five and seven years, just like a car purchase. 

Down Payment

While a down payment is not always required, planning on one will definitely help you keep from getting in over your head on a loan. Most loans will require between 10% and 20% as a down payment, and although you are sure to be able to find some sales with 0% down offers, taking advantage of that type of offer could mean that the boat depreciates faster than you can pay it off, and you end up underwater.

Keep in mind: even a 0% down sale will take a down payment if you have one, so go ahead and plan on having one in your corner.

Interest Rate

Once again, interest rates for boat loans are very similar to those for automobiles—ranging from 4% to 6% APR on average. Still, like any other loan, the interest rate you will get will be based on a number of factors, including your credit score, income, down payment and loan amount.

How to finance a boat

There are three common avenues for financing a boat: your financial institution (bank or credit union), dealer financing, and marine financing. Let’s explore each.

1. Bank Financing

Just as with a new car loan, there are a few options available to you through your financial institution. Some credit unions offer true boat loans with a fixed monthly payment over a span of time — sometimes up to 15 years. If the loan is secured, it will likely be the boat itself that serves as collateral. If the loan is unsecured (no collateral needed), you will spend more in interest and have a higher payment.

A second option that many use for a boat loan is a Home Equity Loan or HELOC (Home Equity Line of Credit). Instead of securing a boat loan with the boat serving as collateral, these two financing options use your home as the financial leverage and provide liquid funds based on the equity you have built into your home.

2. Dealer Financing

Similar to automotive dealerships, many boat dealers offer their own financing for watercraft. Oftentimes you can get a great rate or terms for utilizing dealer financing, but keep an eye out for added fees and unfamiliar charges. If you’re not sure about certain fees or expenses, be sure to ask for clarification.

3. Marine Financing

There are organizations — like the National Marine Lenders Association — that “certify” lenders specifically for boat financing. This certification is based on the premise that people who know boats can make the best boat loans. Finding one of these lenders may prove beneficial as there are a number of perks they can offer the buyer, but it’s always best to shop all of your alternatives to know if you’re getting the best deal.

Other alternatives to boat financing

If you really want a boat but choose not to finance your boat purchase, you still have other options, including rental, joining a boat club, or saving up on your own.

1. Boat Rental

In many cases, a marina will offer boat rentals by the hour or by the day, allowing you to enjoy all the thrill of boat ownership with none of the long-term responsibility. There are also peer-to-peer rental groups like Boatsetter, that offer an AirBnB flair to the process.

2. Join a Boat Club

With little more than a membership fee and monthly dues, a boat club is a great way to have access to multiple types of boats anytime you want.

3. Save Up

It may feel like you have a long way to go, but saving for the boat you want is a sure-fire way to ensure you don’t end up underwater in a boat loan. To start, look at creating a Sinking Fund, which will allow you to set aside money each month toward this goal while continuing to pay down debt or save toward other projects at the same time.

Are you looking to buy a boat? Or do you want to start saving for that dream yacht? Regardless of your goals, our team at Spero is here to help! We can help you in any number of ways. When you’re ready, just let one of our member service representatives at any Spero branch know!

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