Financing Your Next Boat

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Money is getting more available and lending institutions are once more getting into the marine market  (published September 2014)

In the sailing market, almost half of all boats purchased new or used are bought with cash. Yet, that means the other half are being financed through a lending institution.

Since the financial collapse and the Great Recession, money has been extremely tight. Banks and lending institutions have been wary about lending in the leisure markets and have tread very carefully as they evaluate lending money to an individual to purchase a boat—something he doesn’t need.

The reason, of course, is that when the economy tanked a lot of people with boat loans defaulted and left the banks with assets they couldn’t sell. The recession was a great time to buy a repossessed boat or one that the owner needed to dump quickly. But most people were not able or willing to take advantage of the opportunity. Certainly, the banks weren’t going to take the risk.

But, over the past five years, the economy has grown stronger, individual debt has been reduced and, gradually, the lending institutions have got back into the lending business for new and used boats. But, getting a loan is not easy.

HOW MUCH?
If you are planning to buy a boat and want to use borrowed money to do it, then you should shop around among the marine specialists, such as Essex Credit or Sterling Financial, and find out what they have to offer. Interest rates are fairly low these days, between 4.5 and 7 percent. But, that is only part of the story.  What down payment will the institutions require? What can you honestly afford to pay in monthly installments? And, what length of time do you want the loan to span, usually between 144 and 240 months.

When you have jumped through these basic hoops, you will have a good idea of what your budget can afford and how much you can actually spend on your new boat

CREDIT
Your credit score will have a major impact on a bank’s decision to offer a loan and at what rates. The score is one part of the puzzle but if the bank has any doubts about the transaction, a less than stellar score will be the tipping point in their decision.

Marine lenders are looking for customers with pristine credit and no skeletons in their financial closets.  Part of the reason banks have been shy about lending for boat purchases is that during the recession customers with pristine credit were  hard to find. In the aftermath, that picture is gradually improving.

COLLATERAL
The old joke is that bankers like to loan to people who don’t need to borrow the money. But today that is not really a joke. Boats are not considered readily marketable assets by some banks so they often discount the value when assessing the boat’s collateral value. Some institutions will require other forms of collateral such as a lien against a home or investments.

The question for the buyer is to judge how much he or she wants to tie up other assets in a package that the bank needs to secure finance for the boat. Obviously it can get complicated.

Another approach to this issue is to use a mortgage on property that you own to raise the cash to buy the boat. This works because you are borrowing against an asset that over time will appreciate (unlike the boat) and you can deduct the interest from your taxes.

RESTRICTIONS
If you do go to a lending institution to finance your new boat, make sure you lay out to the lender just how you plan to use the boat and where you intend to take it. You may find that the bank will not allow you to leave the country, thus preventing you from sailing to the Caribbean of Mexico for the winter.  And you may discover that the bank won’t permit ocean passages outside a specific distance from land.

Banks will require you to carry comprehensive insurance on the boat and you will find that the insurance companies also have rules and restrictions on where and how you use it.  You may have to pay an additional premium if you want to enter the boat in a race. You will also have to pay an additional premium if you want to take the boat into the hurricane belt during hurricane season. And you may find that you are not permitted to charter the boat without a specific rider and an additional premium.
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THE BOTTOM LINE
Borrowing money is always a big decision since it will tie you to the institution for a long time.  But, financing a purchase is a very American thing to do and allows us to enjoy our lives in ways that might not otherwise be possible.

Buying a boat is also buying a lifestyle. In many ways it is like buying a second home in some lovely place with a great water view.  Plus, when you get tired of one view, you just up the anchor and find another one. So, the boat is more than just a boat, it is a great pastime for you and your family that builds relationships and puts you close to the natural world in a very unique way.

You may well find financial benefits to borrowing money to buy a sailboat. This is particularly true if you can find ways to generate income while using the boat by taking photos, freelance writing or making instructional and entertaining videos. And, you may be able to declare your boat a “second home” and gain some tax advantages. It is worthwhile discussing the possibilities with an accountant.

The bottom line is that owning a sailboat, particularly a boat in which you can cruise  for weeks at a time, is a life changing experience for you and your family and worth every penny of principal and interest you may have to pay back to the bank.

Author: Blue Water Sailing

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