Picture yourself sipping a cool refreshment as the sun beams down on you and there’s the sound of water lapping against the side of your boat. Ahh, that’s the life, isn’t it?
Well, this daydream may be easier to make your reality than you thought! We’ve put together five of the best ways to finance a boat, explained how boat loans work and listed some considerations to keep in mind before you finance.
How Can You Finance a Boat Purchase?
Boats aren’t particularly difficult to finance but they can involve a lot of paperwork and expenses. You can get secured and unsecured loans to finance a boat. Boat loans function similarly to a car loan in that you could walk into a showroom, pick out the boat you want, qualify for financing and then leave soon after with your new boat. 🕶️ 🛥️
But boat loans can be more expensive than car loans, depending on your financial situation and what kind of boat you’re looking to purchase. Other factors that determine how expensive a boat loan can be are the loan terms, your credit score, your debt-to-income (DTI) ratio and your down payment.
Let’s take a look at the 5 best ways to finance a boat.
1. Secured loan through a dealer
You can get financing directly through a boat dealer with a secured loan. In general, a secured loan uses collateral (usually whatever you’re financing, so in this case, your boat) against your loan. If you don’t make your payments, they can take back the collateral.
Generally, boat dealers will partner with a lender that extends the financing. Getting financing through a boat dealer may also afford you a special financing deal with the boat manufacturer (like lower interest rates or extended warranties) that you wouldn’t get if you went straight to a lender.
2. Secured loan through a lender
If you don’t want to go through the dealer, you can get financing through a lender with a secured loan. Banks, credit unions and online lenders offer boat loans and some lenders even specialize in marine loans. With secured loans, the lender is underwriting not just for the borrower but for the collateral, too. Because of this, there are limits on what boat you can get.
You can apply for preapproval based on the price of the boat you are looking at buying, or you can apply for a loan once you know which boat you want to buy. Just remember that there are some limits on the boats that lenders will accept for a secured loan, so you may end up being denied if the boat doesn’t meet their requirements.
If you don’t want to use the boat as collateral, two other secured loan options will let you use your home as collateral: a home equity loan or a home equity line of credit (HELOC).
3. Home equity loan
A home equity loan, or second mortgage, allows you to convert the equity (the difference between what you owe on your mortgage and the home appraisal value) in your home into cash. 💵 💵 Home equity loans can be really risky because if you default on your payments, the lender may be able to take your home.
With a home equity loan, you get one lump sum to buy the boat. The loan usually has a fixed interest rate with fixed monthly payments. You and your lender will determine the length of your repayment period.
4. Home equity line of credit (HELOC)
Similar to a home equity loan, a HELOC is another type of second mortgage that allows you to convert your home equity into cash. But instead of it being a loan, a HELOC is a revolving line of credit. This means that during a certain period of time (called your draw period) you can borrow up to the credit limit your lender specifies. After your draw period, you pay it back similar to a credit card.
But unlike home equity loans, HELOCs have a variable interest rate, which means your payments will change with any interest changes.
5. Unsecured loan
A personal unsecured loan through a lender is another financing option. With this loan, the lender won’t hold your boat as collateral because, instead of underwriting with the collateral (aka your boat) in mind, the lender is just underwriting using your finances and personal information.
This also means that you can use unsecured personal loans to buy pretty much whatever boat you want, since there are no limitations on what you can buy with the loan.
Interest rates for unsecured loans are usually higher than for secured loans because the lender doesn’t have any collateral to hold if you default on your payments. And personal loans are usually limited to $50,000, so keep that in mind when looking at boats.
How Do Boat Loans Work?
Boat loans work a lot like car loans. So if you’ve had a car loan before, you might already have a good understanding of how a boat loan works. Let’s take a look at some of the parts of boat loans:
- Repayment terms: Your loan repayment term will depend on many factors like the loan amount, the age of the boat, and the lender. Most boat loan terms are between 5 – 20 years. Remember, the longer your repayment term, the more interest you’ll pay. If you get an unsecured loan, you may be able to get a shorter repayment term, but that could mean higher monthly payments.
- Down payment: For most boat loans, you’ll need to make a down payment of around 10% or more, but the specific amount will depend on the boat cost and the lender. However, there are some boat loans you might be able to get that don’t require a down payment. The larger your down payment, the lower your loan principal and the less interest you will pay over the life of your loan. A larger down payment may also decrease your monthly payments.
- Interest rates: Your interest rate will depend on the type of boat you buy, the type of loan you get, your lender and your credit history. Ideally, you’ll want a credit score in the high 600s to get better loan terms, but some boat loan lenders have lower or no credit requirements. Make sure you compare rates between lenders so you get the best rate.
What Are the Pros and Cons of Financing a Boat?
Financing a boat comes with benefits and drawbacks, just like any other loan. We’ve created a list of some of the pros and cons to help you decide if financing a boat is right for you.
Pros of financing a boat
- Get your dream boat: A boat loan may help you buy a boat that seems unattainable on your own.
- Buy it today: Because you’re not paying for the whole boat upfront, you might be able to buy your boat sooner, through financing, rather than waiting to save up for the whole thing.
- Build your credit: Getting a loan and making your payments on time can help you build your credit history and may boost your credit score. All of which wouldn’t be possible if you paid for the boat in cash.
Cons of financing a boat
- More expensive: Financing a boat will likely be more expensive than if you bought it in cash because you have added interest paid over the life of the loan. Add to that any fees or financing expenses that come with getting a loan.
- Backsies: If you have a secured loan, you risk the lender taking your collateral if you default on your loan payments. Depending on the type of loan you have, this could be your boat or your home.
- Going underwater: You could also run the risk of owing more on your boat loan than what the boat is worth (aka going “underwater”) because the boat’s value depreciates over time.
- Added costs: Having a loan payment with interest is another cost to add to all the other costs you’ll already be paying for when you own a boat (more on that in a bit).
What Should You Consider Before Financing a Boat?
Buying a boat is a big investment, so make sure it’s not only something you want, but something you can afford and handle. Here are some points you should consider before you finance a boat:
- Credit score and DTI: You’ll want to make sure you have a credit score at least in the high 600s and have a low DTI (the exact number depends on specific lender requirements) to qualify for more favorable loan terms. But some lenders do work with people who have lower credit scores.
- Total cost of owning a boat: Make sure you know the total cost of boat ownership before you apply for a loan. It can come with a lot of expenses like maintenance, fuel, storage, insurance, taxes, registration, towing, winterizing and more.
- Marine survey: If you’re buying a used boat, you’ll want to get it inspected before you buy it. If you’re financing a boat, especially through a secured loan, the lender may require you to get it inspected before they give you a loan.
- How you plan to use the boat: There are many different kinds of boats out there. Knowing what you want to use it for (like relaxing, fishing or water sports) can help you decide which boat type to buy, how much you can afford and if you want a new or used boat.
Most lenders will finance a used boat, but you may end up with a higher interest rate and/or a larger down payment. You’ll also need that marine survey we talked about to make sure the boat you’re buying is in good condition.
If you can’t find a lender that will give you a secured loan for a used boat, look at getting an unsecured personal loan, home equity loan or HELOC since you can use the money to buy any boat from any seller.
Some lenders will work with people who have lower than ideal credit scores. If you have a lower credit score, don’t automatically assume you won’t be able to get a loan. You may be able to negotiate terms (like taking on a higher interest rate), make a larger down payment or get a co-signer to qualify for a loan.
You’ll also find that other lenders don’t have credit score requirements for boat loans, so shop around. Just make sure you can actually afford to repay the loan.
Alexa, Play “I’m on a Boat”
Whether you want to ride the waves on a pontoon or you’re getting your towels ready because it’s about to go down, financing a boat can help you make your boat dreams come true!
But before you ask Alexa to play The Lonely Island’s summer theme song, make sure you know all the expenses that come with financing and owning a boat.
The Short Version
- Boats aren’t particularly difficult to finance but they can involve a lot of paperwork and expenses. You can get secured and unsecured loans to finance a boat
- Your loan repayment term will depend on many factors like the loan amount, the age of the boat, and the lender. Most boat loan terms are between 5 – 20 years
- Ideally, you’ll want a credit score in the high 600s to get better loan terms but some boat loan lenders have lower or no credit requirements