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Taking out a loan to purchase a boat is a lot like taking out a loan to buy a car or a home.
You can get a secured boat loan that offers the boat as collateral or an unsecured loan that will carry a higher interest rate and a lower borrowing limit.
Several lenders offer boat loans, or you can get creative and take out a second mortgage to pay for your boat. You have several options depending on your financial situation and how much you want to spend.
Boat Financing Options
You have several ways to finance a boat purchase, and weighing the best option for your situation and aggressively shopping for the best deal is critical.
The loan term and interest rate you can get depends on several factors, including your credit score, debt-to-income ratio, income, the loan size, and whether you choose a secured or unsecured loan.
Pay Cash
If you have enough money, paying cash means you won’t incur finance charges and added fees. It’s not a feasible move for everyone, but it makes sense if you’ve got the means to do so.
Dealer Financing
If you’re buying a new boat, dealers are eager to work with you on financing because both of you want the same thing. It’s also convenient because you can arrange for it at the same time and place as you’re making the purchase.
The downside is that dealers get a cut of the earnings on these loans, which are arranged through separate financial institutions. That can make them more costly than other types of financing you qualify for.
Banks and Credit Unions
Banks, credit unions, and other lenders make boat loans, just like they do for automobiles. Boats have predictable resale value, so you can get secured loans for boat financing using the boat as collateral, exactly like a car loan.
Institutional lenders usually let you finance a boat for 10 to 20 years, depending on the size and cost. You can often finance a used boat, but the loans will be limited to shorter terms.
You may not qualify for secured financing if the boat is too old and lenders determine there is too much risk for a boat that may not last long.
Expect to pay a higher interest rate than you would on a mortgage or an automobile, with higher rates on longer loans. Very low advertised rates for boat loans are often for shorter terms with higher monthly payments than you may want to take on.
You May Qualify for a Boat Mortgage
When you want to buy a boat that functions as a vacation home with a galley, head, and sleeping berths, you might be able to deduct interest payments on your boat loan just like you can with a home mortgage.
Discuss this with lenders to see if it’s a valid option in your case. However, you cannot already be taking the deduction on a second home, and there are restrictions on leasing the boat out or otherwise using it to generate income, such as charters.
Home Equity Loan Financing
A home equity loan is one of the best ways to finance a boat. Interest rates are often better than you can get on a regular boat loan, and you can deduct interest paid on a home equity loan up to a point, meaning you can still get an interest tax deduction even if your boat doesn’t qualify as a second home.
Consider a home equity line of credit (HELOC) if you’re looking for payment flexibility. These work as interest-only loans during the “draw” phase, the period you can borrow against your line of credit, usually 5-10 years.
This allows you to minimize your monthly payments when needed and make larger payments against the loan principle when you can.
HELOCs are set up as adjustable-rate loans during the draw phase, so you need to be alert to the possibility your interest rates could rise significantly before you’re required to begin repaying the loan principle at the end of the draw phase.
Another possibility is a cash-out refinance of your existing mortgage. You refinance your home and pull out excess cash based on the equity you’ve built up, using that to pay for your boat.
The biggest downside of borrowing against home equity is that you’re putting up your home as collateral. If you can’t keep up with the payments, the lender can foreclose on a home equity loan like on a regular mortgage, and you could lose your home in the process.
How Boat Loans Work
If you’ve taken out a car loan in the past, you have a working knowledge of how boat loans work.
Typically, you can apply for a 20-year loan with good credit for a secured boat loan. Some of this depends on the size of the loan and the lender’s requirements.Unsecured boat loans are considered personal loans and have shorter terms of no more than five to seven years.
Boat loan lenders often require a 10% and 20% downpayment to show you’re fully committed to the transaction. Some lenders offer 0% down loans, but that means you’ll be stuck with a maximum payment in the face of a boat depreciating, which could lead to a situation where you owe more than the boat is worth.
Interest rates on boat loans are typically fixed and can vary widely based on the lender and your credit profile. Check with your lender to see current rates, understanding that the rate you get will be partly influenced by the boat type and model year, your credit history, loan term, and loan amount.
Also, boat loan payments are only some of the expenses you’ll incur as a boat owner. You must factor in other costs, including slip fees, insurance, storage, fuel, repairs, regular maintenance, taxes, and registration.
Financing a Boat with Bad Credit
Boat loans tend to have stricter credit requirements than mortgages and auto loans because they’re considered luxury items. You shouldn’t have any problem with a FICO score of 700 and above, but the further away from that score you are, the more challenges you’ll encounter.
Lender requirements for boat loans vary, so it pays to shop around for an institution sympathetic to your situation and flexible enough to help you get the deal done. Understand, though, that bad credit means you’re considered more of a risk, and you’ll pay for the privilege through much higher interest rates.
You May Need a Marine Survey
When you apply for a secured boat loan, the boat’s value will be a factor in how much you can borrow. You may be required to get a marine survey, much like a home loan appraisal.
The lender must know what the boat is worth to set an accurate limit on how much to loan you. A marine survey entails examining all parts of the boat from stem to stern and will detail the boat’s condition and whether repairs are needed to make the boat water-safe.
A licensed professional performs a marine survey, which will cost between $10 and $20 per foot of length, depending on the type of boat.