How To Finance A Boat

Written by
Kirk Haverkamp
Read Time: 6 minutes

A boat, large or small, motor or sail, can be a great place to relax after a hard week in the office. Learn how to finance your own dream yacht.

It's not only Popeye the Sailor Man who dreams of cruising on the high seas. People from all walks of life share the same goal. But pleasure craft are expensive. So unless you're already sitting on a big pot of money, you'll need to address the question of how to finance a boat. Fortunately, you have several options

Dealer financing

This is the one that jumps right out at you. You go to a boat show or to a dealership, and there are big signs all over the place telling you exactly what it takes per month to make this baby yours.

Dealer financing is convenient, because you can arrange it at the same time and place as you're making the purchase. On the down side, dealers get a cut of the earnings on these loans, which are actually arranged through separate financial institutions, so they can be more costly than other boat financing options. Be sure to shop around.

Go to the bank

Banks, credit unions and other lenders make boat loans, just like they do for automobiles. Boats have fairly predictable resale value, so you can get secured loans for boat financing in which the vessel serves as collateral, the same as with an automobile loan.

How long can you finance a boat for? Usually 10-20 years for a new vessel, depending on the size – personal watercraft loans may be considerably shorter. You can often finance a used boat as well, but the loans will be limited to shorter terms. You may not be able to get secured financing at all if the boat is too old – lenders don't want to finance a boat that may not be on the water much longer.

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.

A boat "mortgage"

Here's something many prospective boat owners are not aware of. You can sometimes deduct the interest payments on a boat just like you can with a home mortgage. To qualify, you need a boat that can function as a vacation home, with a galley (kitchen), head (toilet) and sleeping berths.

However, you cannot already be taking the deduction on a second home and there are restrictions on what you can do in terms of leasing the boat out or otherwise using it to generate income, such as charters.

Bank on your home

One of the best ways to finance a boat can be through a home equity loan, also called a second mortgage. First, the interest rates are often better than you can get on a regular boat loan. Second, a couple can deduct the interest paid on up to $100,000 in home equity debt ($50,000 for a single), meaning you can still get an interest tax deduction even if your boat doesn't qualify as a second home.

If you're looking for payment flexibility, consider a home equity line of credit (HELOC). These work as an interest-only loan during the "draw" phase, the period during which 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 loan principle at the end of the draw phase.

A regular home equity loan is more straightforward. You borrow a certain amount and begin repaying it immediately with regular monthly payments. Standard home equity loans can be either fixed- or adjustable-rate.

Another option is to do a cash-out refinance of your existing mortgage loan. This may be a good choice if you can also reduce your current mortgage rate in the process of refinancing.

The major downside of borrowing against home equity is that you're putting up your home as collateral. If you should be unable to keep up with the payments, the lender can foreclose on a home equity loan the same as it can on a regular mortgage, and you could lose your home in the process. So only go this route if you're certain you can easily manage the payments and weather unexpected financial challenges.

Can I finance a boat with bad credit?

Boat loans tend to have stricter credit requirements than mortgages and auto loans do, because they're considered luxury items. You shouldn't have any problem with a FICO score of 700 and above, but the further your score falls below that, the more challenging it will be.

Not all lenders have the same credit requirements for boat loans, so just because you're turned down by one doesn't mean you won't be approved by another. Shop around. Be aware, though, that lower credit scores mean higher interest rates – often dramatically higher.

Necessary preparation

Like any major purchase, you can make your boat-buying experience a bit easier with some preparation.

If you're looking at a used vessel, get a professional survey done before signing the closing papers. In fact, most banks would require a clean survey before approving your boat loan. A survey is the equivalent of a home inspection, done by a licensed professional. It will cost between $10 and $20 per foot of length, depending on the type of boat-and it's worth every penny. Approximately 12 percent of all boat damage comes from improper maintenance, which can be hard for an untrained eye to detect.

Whether you're going new or used, it's a good idea to pre-qualify for the loan before shopping. That way, you'll know what you can afford, and the seller will know that you're a serious buyer. Your negotiations will be faster and smoother.

Buying a boat is surely an exciting time and it's pertinent to know what credit is available when making such a big purchase. Whether you opt for dealer financing, HELOC loans or take a separate boat loan, your best bet will to exhaust all your options to get the best package deal.

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