Pent-up demand, plenty of available credit and cheap money mean boat loans are available.
If you’re looking for a new or used boat and are thinking about financing, know that the climate is dramatically different from five years ago, even for loans of $250,000 or more. Pre-recession, anyone who could fog a mirror seemed eligible for a loan. Then, during the depths of the economic mess, even some folks with a job, excellent credit and lots of liquidity couldn’t get a loan. During the downturn, delinquencies hit an all-time high, boat values declined by a third (which was more than car values) and repossessions were common. Banks were left holding depreciating assets for which there was no market. Many lenders got out of the game, and those that stayed suffered losses.
Fast-forward a few years. Even after the latest miniscule rate hike, interest rates are still low and lenders — national and local banks, financial services firms and credit unions — are returning to marine lending. Michael Bryant, president of the National Marine Lenders Association (NMLA) and principal at Trident Funding Corp., assessed the current marine lending climate thusly: “Lending won’t return to pre-recession practices, but it’s growing and the business is evolving. It’s not a world of stated income anymore. Lenders are doing their due diligence, and with today’s access to online resources, it’s easy to do background and reference checks and income verifications.”
Borrowing is necessary as boats get bigger and more expensive. Per Bryant, the average loan size in Southern California is around $300,000. It’s a little less in the Bay area, due to the large number of sailboats, and a little more in the Pacific Northwest. “Nobody likes to be told no,” Bryant said. “There’s plenty of money in the credit pipeline and more confidence overall, so there’s been an uptick in larger loans.” Peggy Bodenreider, regional manager at Sterling Acceptance Corp., also sees positives. “The good news is that more lenders are coming back and they are all looking for market share gains, so the competition has increased,” she said. “New boat buyers especially should look for experienced marine lenders and brokers to guide them through the process.”
The NMLA, which was formed in 1979 and serves to “educate current and prospective lenders in marine financing procedures and promote the extension of credit to consumer and trade borrowers,” is an excellent source of available lenders and loan originators.
Pent-up demand is the order of the day. “During the downturn there were more cash buyers,” said Rick Day, chief financial officer at South Coast Yachts and principal at Steadfast Finance. “Now, people are looking for loans, and we have them. Fixed, adjustable and even interest-only loans are back. Boaters can expect a standard 20/20/4.5 loan (20-year loan with a 20 percent down payment at 4.5 percent interest) to be processed quickly and relatively hassle free. People are fed up with the recession.”
Fed up indeed. So what are some key elements of marine lending these days?
8 ELEMENTS THAT DEFINE AN ATTRACTIVE BORROWER
Attractive qualities of a borrower don’t differ dramatically with the type of asset being financed, but there are some nuances. Lenders will look for the following.
1: DEBT/EQUITY RATIO. If the borrower has financed a primary residence, a second home, an RV and a couple of cars, chances are the lender will see him as overextended already.
2: LOANS OF SIMILAR SIZE. Assuming the debt/equity ratio is in check, lenders do want to see that the borrower has managed loans of a similar size and will not be overwhelmed by the current transaction.
3: LIQUIDITY AFTER DOWN PAYMENT. Just getting into the loan shouldn’t eat up all the borrower’s resources. Lenders look for liquid assets that will cover 12 to 16 months of payments if an employment situation should change.
4: PRIMARY RESIDENCE. A home is excellent collateral, and lenders want to know that the individual has other high-value assets as a potential second source of repayment.
5: GOOD CREDIT SCORES. Credit scores in the 700s and 800s are ideal. However, even scores in the 600s may be acceptable today as long as the other criteria look good.
6: STABILITY. Consistency is important in more ways than one. Certainly, a show of stable employment is key. However, lenders today look for stability in the community, as well: Is this person who he says he is, and does he have history in his profession as well as his personal life? Today’s lender is not looking at the asset (boat) but the person as a whole, and everyone has an online footprint to define him.
7: HIGH NET WORTH. This appeals to banks for more than the obvious reason — that the borrower has the resources to repay the loan. A 2:1 net worth-to-debt ratio is good. Financial institutions are also looking to cross-sell their products, and high-net-worth individuals represent opportunities for other kinds of financing, including a primary residence, a second home, an auto, an RV and even a business.
8: PRIOR BOATING EXPERIENCE. Having gone through the boat-buying process before is a plus. Lenders know that experienced boaters understand the requirements of marine lending as well as the ongoing costs of boat ownership and are less likely to overcommit when choosing a vessel
5 MYTHS ABOUT BOAT FINANCING
1: IT’S TOO HARD TO GET A BOAT LOAN. The lending climate has changed, and the vast majority of boaters will qualify to get a loan. The process is more rigorous and the background and reference checks may be more thorough, but the number of loans being made is increasing, which is good news for boating overall.
2: FINANCING IS ONLY FOR THE PRICE OF THE BOAT. Hard or tangible assets — electronics, anchoring packages, bottom paint, extended service plans, etc. — can often be rolled into a boat loan. That said, the labor to install the electronics, apply the bottom paint and perform commissioning tasks for new boats cannot be financed. Furthermore, lenders will seek a proof of payment of taxes before finalizing the loan.
3: USED BOATS CAN’T BE FINANCED. Since more than 85 percent of boats sold in the U.S. are pre-owned, it’s good that used boats can indeed be financed. It is, however, more complicated and often more expensive to secure a loan for a used vessel. First, used boats need a survey or an appraisal, which means a haulout and other costs. Sometimes, a bank will require comparables in addition to the survey in order to assess a fair market value. A title examination will be needed to make sure there are no outstanding liens. Some lenders will finance a boat that is up to 20 or 30 years old or offer special lower rates for vessels that are less than 10 years old.
4: SUBPRIME BORROWERS NEED NOT APPLY. Because there are more lenders all looking to get into the marine lending game, borrowers with credit scores in the 600s may still qualify. The tradeoffs will be higher rates and down payments, but many lenders are willing to make a deal.
5: IT’S JUST LIKE REAL ESTATE. In some ways, securing a marine loan is easier and faster than borrowing for a house. But borrowers are buying an asset they don’t really need and should expect to pay at least 10 percent of the initial price for its annual upkeep, maintenance, slip fees and possibly crew costs — and that’s without major upgrades. In fact, a boat is a lifestyle, so it’s not a good idea to be so stretched by a boat loan that the boat becomes a source of stress that negates the benefits of that lifestyle.
12 Things to Keep in Mind when Borrowing
You’re not alone. Approximately half of all boats are financed, and that percentage gets higher with new boat purchases. Today, a 35-foot-plus new cruiser can cost $250,000 to $1 million or more, so there is a healthy industry set up around providing boat loans. There are many experts to guide you and make the process less foreign or daunting.
1: MARINE LENDERS HAVE AN ADVANTAGE. Lenders who know the marine industry can process paperwork faster, provide worksheets with guidelines of all the things that are needed for a boat loan vs. a real estate loan, can refer needed resources and have an interest in making the loan go through. They may be measurably quicker and easier to work with than a borrower’s personal banker.
2: INSURANCE IS NECESSARY. As with real estate, insurance is a must and will need to be arranged for prior to the loan closing. Fortunately, your broker can help by providing a list of reputable vessel insurance agencies.
3: PAY NOW, BORROW LATER. Borrowers can pay cash to get the vessel immediately but then opt to finance later. Sterling Acceptance and Essex Credit, for example, offer financing within three to six months of purchase, but not years down the line.
4: TAX DEDUCTIONS ARE POSSIBLE. As long as the vessel has a bed, a head and a galley, it qualifies as a second home, so the interest is deductible on federal tax returns. It’s a great way to reduce tax liability.
5: AUTOMATIC PAYMENTS ARE POSSIBLE. You can set up auto-payment with your lender, so you never miss a payment or dent your credit score.
6: LIVEABOARD STATUS IS FROWNED UPON. Banks don’t like to hear that the borrower will be using the boat as a primary residence. Eviction laws make it difficult to repossess a boat that is lived on and, by definition, a liveaboard presumably also has no primary residence to be used as collateral. That said, it’s not impossible to finance a boat that will serve as a home.
7: CHARTER BOATS CAN BE DIFFICULT. Many lenders will not finance a boat that is going to be put into charter, since it will be used for commercial purposes. It’s possible to finance a charter boat, but specialty lenders and rules come into play.
8: FAMILY TRUSTS ARE POSSIBLE. A vessel may be put into a family trust. Factor in additional costs for attorney fees to make this happen.
9: LLCS ARE MORE COMMON. More borrowers are putting yachts into single-asset limited liability corporations, so long as the boat is meant for personal use. This has some tax advantages, especially when it comes time to sell.
10:HIDDEN COSTS LOOM. Buying a boat that lists for $500,000 does not mean you’ll finance $400,000 even after a 20 percent down payment. Costs that must be factored into the overall price include the U.S. Coast Guard documentation fee (approximately $500), a survey for older vessels (approximately $25/foot of overall length), insurance, loan processing fees, taxes, freight, commissioning and more.
11: BROKERS ARE A RESOURCE. Boat dealers and brokers are great free resources. They have a vested interest in selling a boat and have relationships in the marine industry with lenders, insurers, surveyors and repair facilities. They can walk a borrower through the lending process and manage expectations on the timeframe and necessary steps.
To the Web
> BoatLenderUSA.com (Sterling Associates) > EssexCredit.com
> MarineLenders.org (NMLA) > SteadfastFinance.com
> SterlingAcceptance.com > TridentFunding.com