Boat Loans: Check your options

There’s a reason boats feature so often when advertisers want to sell a prestige product and social media influencers wish to build aspirational images for themselves. Yes, boats are instant fun. But they’re also one of the ultimate status symbols. 

No wonder so many people want one. Unfortunately, few outside of C-suites and Wall Street can afford to pay cash for theirs. And that’s where boat financing comes in. 

Boat loans come in several flavors. And each has its pros and cons. 

Secured vs unsecured financing

In a secured loan, you pledge an asset as a guarantee against default. Your mortgage and auto loan are examples of secured borrowing. If you fall too far behind with your mortgage payments, you’ll face foreclosure. And if the same happens with your car payments, a repo team will turn up and take away the vehicle. 

Unsecured financing means you qualify on your own creditworthiness. 

That’s the essential difference between secured and unsecured borrowing. With the first, your lender has a direct legal route to seizing the asset that secures (is collateral for) your loan. With the latter, which includes credit cards and personal loans, there’s no such route.

This typically makes secured borrowing less costly than unsecured borrowing. The lender stands a better chance of recovering at least some of its money if the loan goes bad. And so it can afford to offer lower interest rates. However, as our examples show, this isn’t a rigid rule.

Example of an unsecured boat loan: LightStream

LightStream offers unsecured loans at very low rates to highly qualified buyers for amounts between $5,000 and $100,000. The application can be completed on a smartphone and decisions are sometimes delivered the same day.

Example of a secured boat loan: U.S. Bank

US Bank’s secured boat loans top out at $150,000. Terms are competitive, and particularly appealing for those wanting to borrow $25,000 over 48 months or less for a new boat. Decisions are sometimes delivered the same day. 

Boat loans: Things to look out for

Boat loans are just loans. So, let’s first cover some points that apply whenever you borrow:

1. Your credit score will play a huge part in determining whether your loan application is approved and the interest rate you will pay – Check yours before shopping for a boat or boat loan. If necessary, consider postponing your purchase so you can address any issues.
2. Lenders will compete for your business. Get quotes from multiple lenders. The differences in costs can be surprising. And you might save yourself a bundle.
3. Watch out for variable-rate loans – These float (appropriately for boat loans) in line with other interest rates. If rates go up, the payment could become unaffordable. 
4. Factor in the cost of boat ownership when you decide what monthly payment you can afford. Use a boat loan calculator to model your options.

Boat financing options

Don’t assume you need something called a “boat loan.” One may turn out to be your ideal choice, but you won’t know whether that’s the case unless you explore other options. 

Boat loans from boatyards and yacht brokerages

It’s wise to view boatyards and yacht brokerages as you do car dealerships. Sometimes they’ll offer the best deal in town. Other times you might get a more competitive offer from your own bank. In the showroom, expect to feel the same pressure to buy as you would buying any other vehicle. Research financing offers before you check out boats.

Banks, credit unions, and specialist lenders

Many banks and credit unions offer boat loans. Get a handful of quotes to compare. The more quotes you get, the better your chance of securing the best possible deal open to you. You’re limited only by your willingness to persevere.

Tap your home equity

You might be able to finance your boat purchase using a home equity loan.  To do so, you need sufficient equity in your home, which is the amount by which your home’s market value exceeds your mortgage balance. 

A home equity line of credit (HELOC) might be a good idea if you aren’t sure how much money you’ll need, such as for maintenance. With a HELOC you can draw money as you need it during a draw period, up to your borrowing limit. During the draw period you might only have to make interest payments. At the end of the draw period, the line of credit typically converts to a regular loan with a regular payment. 

In a low interest environment, a cash-out refinance can be an affordable way to finance large purchases such as boats. This is not a good idea if it would mean converting your existing mortgage to a higher rate than what you have. 

Personal loans

Depending on your credit standing, a personal loan might offer very competitive terms. One obstacle may be the loan limit. Only a few personal loan lenders make larger loans, up to $100,000. So whether a personal loan will work for you partly depends on the cost of the boat.

Boat loans and tax breaks

You can’t get a mortgage for a boat. However, a boat may be a qualified home for tax purposes.

The IRS suggests you may be able to claim federal income tax relief on the interest on the loan you use to finance your boat: “For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”

What is the average boat loan term?

Most boat loans last for between four years and 20 years. However, you may be able to find one with a two-year term.

This flexibility allows you to choose monthly payments that you find affordable. Keep in mind that a longer term can bring your payment down, it will increase your total interest charge.  

What is the average boat loan interest rate?

Near the end of 2022, boat loans were being advertised at rates as low as 5.99% APR. And those were actually appreciably lower than rates at that time for 30-year, fixed-rate mortgages. Advertised rates are always for the most well qualified applicants.

Interest rates are typically lower for larger loans and shorter terms.

What Credit Score Do I Need for a Boat Loan?

If you want the uber-low rates mentioned in the previous section, you’ll likely need a score of 720 or higher. However, some loan applications for boat financing are approved for people with scores in the low 600s. Indeed, at least one lender says it  does not have minimum credit score requirements at all, though it will look at other factors.

When we’re talking about finances, the lower your credit score the more you’ll pay for the loans you need. be charged. You can keep more money in your pocket by working to get your credit score as high as it can be. It’s not hard to improve your credit and you might see results in just a few months. 

Costs of buying a boat

There aren’t too many unique costs associated with buying a boat. You’ll need to find a down payment. Lenders might require 10%-20% of the boat’s purchase price. Some lenders charge closing costs, so you might need to factor in a few hundred dollars taken off the top of your loan. In many states, liability insurance for your craft is mandatory. 

If you’re buying a used boat, consider paying for a boat survey whereby an expert checks over the craft for flaws and other issues.  

Once you own a boat, ongoing costs can include marina fees, out-of-water winter storage, a trailer, and regular maintenance and repairs. And that’s before you think about safety equipment, upgrades, and accessories. 

Boat loan calculator

A boat loan calculator can help you model your financing options. You can input your loan amount, term, and interest rate (APR), and see what difference buying a more or less costly craft or choosing a longer or shorter term will make. 

Can I finance a used boat?

Yes, it is common to finance used boats. 

There are two main caveats. First, some used boats will be regarded as insufficient collateral for a secured loan. If that happens, you would need to find an unsecured loan option or a loan secured by another asset.  

Second, some lenders only finance new boats. Cross them off your list if you’re looking to finance a second-hand boat.