October 5, 2021 by Space Coast Credit Union
If you dream of enjoying the Florida waterways in a sailboat, powerboat, motorboat, cabin cruiser, or other boat type of choice, here’s what you should know about financing and the boat loan process. Fortunately, the purchase process is easier than you might think. We’ll take you through the entire process to help you find the best boat loan for you.
Ready to set sail ASAP? Start your loan process and apply for boat financing here
, and you’ll be aboard in no time!
Exploring Requirements: Boat Loans
Applying for boat loans is similar to applying for car, truck, or RV financing with the purchase you make serving as collateral for the loan. First, you’ll look for a boat that meets your needs and fits your budget and then you fill out an application. Typically, you’ll need to make a down payment — perhaps 10% or 20%— although that isn’t universally true. You’ll also need to meet the financial institution’s guidelines for boat loans with the lender typically looking at your income, debts, and credit score. They may also review your job stability and other factors.
Income and Debt
Lenders often use a debt-to-income ratio (DTI) to determine if someone would qualify for a loan. That’s because an applicant could have a healthy income but have plenty of debt, while someone else may have a lower income but much less debt. It’s typically the ratio that matters to a lender.
Here’s an example. Let’s say that you’ve picked out a new 22-foot pontoon boat with a price tag of $35,000 and you’ll put down 20% ($7,000) and finance $28,000. With an interest rate of 5% and a 20 year term, the principal and interest payments would be $184.79.
To calculate your DTI, you’ll need two pieces of information:
- your gross monthly income
- your total monthly debt payments (such as house/rent payments, car payments, personal loans, student loans, and credit cards)
Let’s say that your monthly income is $6,500 and your monthly debt is $2,000. Add in the new boat payment of $184.79 and that would be monthly debt of $2,184.79. Divide the debt by your income and that’s a DTI of 33.6%. Many lenders want to see a DTI of no more than 36% and so yours fits within this guideline. Congrats, you’ve passed the DTI test!
Here are a couple other examples to illustrate possibilities:
- With the same amount of debt but an income of $5,500 a month, the DTI is 39.7%, and if a lender requires one of no more than 36%, you may need to put down more money or pay off some debt before you qualify.
- With a higher income of $8,000 a month but debt of $3,500 plus the $184.79 payment, the DTI would be 46.1%. (Although the income is higher than in the original example, the DTI is higher because of the greater debt load.)
- With income of $4,500 a month and debt of only $1,200 plus the $184.79 payment, the DTI would be 30.8%. (Although the income is significantly lower than in the original example, the DTI falls within standard guidelines because of the smaller amount of debt.)
As with any loan guideline, not all lenders have the same ones, so check with your financial institution of choice to see what they require to approve boat loans. Perhaps, for example, you could find a lender that allows for a higher than average DTI.
As another route, if the DTI is too high for you to get approved, consider strategies to pay down some debt to make room for boat financing. For example, let’s say that you’re just over the DTI limit, but the lender wants it addressed before approving your loan. In our example, you have a personal loan with a high payment and a remaining balance of $3,000. You could experiment to see if you could make a lower down payment and use those funds to pay off the personal loan. Although that doesn’t guarantee success, sometimes strategies like this one works.
Other times, a debt consolidation loan can rearrange debt in a way that makes the boat loan possible. Here’s a financial calculator
you can use to plug in some numbers and see what will work best for you.
A credit score is a composite number that provides a snapshot of your overall credit when you apply for a loan — and the higher the credit score, the better.
This score can help a lender decide whether to approve a loan, and if so, at what interest rate and term. That’s because when deciding what loans to approve, a lender is calculating the level of risk involved for their financial institution. Because past actions can help to predict future behavior, people with good credit scores are, on the whole, considered more likely to pay their new boat loans on time.
Factors that play a role in your score in the general order of their importance include:
- your payment history (how well you pay your debts on time)
- your outstanding balances, especially in relation to the amount of credit you have available on credit cards and other revolving sources of credit (your “credit utilization” with a score of 30% or less being more favorable)
- the length of your credit history (having a more established period of good credit is helpful; brand new credit applicants may need to create one)
- recent applications for credit (too many applications in a short amount of time can be a red flag)
- the types of credit accounts you have, such as a mortgage, car loan, personal loan, credit cards, and so forth (your “credit mix” with a variety of types being a good sign)
Although we’ve been referring to a credit score in the singular, a consumer actually has three credit scores with different lenders relying upon different ones when approving boat loans and other loan types. The number provided by each of them is likely to be similar but not necessarily identical.
The three main agencies that monitor a consumer’s credit and provide scores for lenders are Experian, Equifax, and TransUnion. You can check your credit reports from each of these three agencies (not your scores but the reports) once a year for free. Only one organization is authorized by the federal government to provide these: AnnualCreditReport.com
. As a member of SCCU, you can check your FICO credit score for free
As far as what’s considered a good score, here’s the rubric for Experian’s credit score (FICO®):
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
As with all other aspects of loan approvals, lenders will each have their own requirements about what score meets the mark. If you need to boost your credit scores to qualify for a boat loan, strategies include:
- Making all debt payments on time (at least the minimum amount due)
- Keeping your credit utilization relatively low; using no more than 30% of your available credit can be a plus
- Only applying for credit when you need it
- Asking the lender if they can do a soft credit pull instead of a hard one to prevent it from showing up as an application, especially if you’re just exploring your options and aren’t yet ready to apply.
Also, check your credit reports to make sure there aren’t any errors that can be damaging your credit scores, and reach out to the agencies to make any corrections. This is also a good opportunity to check for any signs of identity theft
. If you see anything suspicious or incorrect, addressing that issue can help to clear up any dings on your credit scores.
Consider Your Personal Budget
What we’ve discussed so far focuses on what a lender might be willing to loan on a boat. You’ll also want to consider your own financial circumstances and how this purchase will fit into your budget. SCCU offers a great guide to creating a budget
, including tips on working your way to financial freedom.
When you’re thinking about what boat to buy, calculate how much of a down payment you can afford and still maintain a savings cushion. Also consider these ongoing costs with a boat:
- fuel costs
- regular maintenance costs
- monthly insurance costs
- docking fees
- transportation to and from the waterway
This information can guide you towards buying a boat in the right price range. Plus, here’s information on getting pre-approved
for a certain dollar amount for a boat loan. At SCCU, this process can be completed in as little as five minutes.
Boat Financing Process
When you’re investigating financial institutions and their boat loans, ask friends and family members who own boats where they got their financing and ask about their experiences with their lenders. Make a list of recommended institutions, and if you want to check them out further, consult the Better Business Bureau
(BBB) to see if anyone has filed complaints.
Then, armed with the knowledge of what lenders typically look for in boat loan applicants — such as DTIs and credit scores — you can compare the financial institutions on your list to find the one that offers what you need.
Compare Interest Rates, Loan Types, and APRs
The interest rate is a percentage that the lender will charge you on your boat loan, and as your principal balance goes down, the amount of your payment that goes to interest will also go down. The lower the interest rate, the better.
As far as loan types, fixed rate loans are the simplest, and for many consumers, preferable. With this kind of loan, the principal and interest payment stays the same for the life of the loan, which makes it the easiest to budget, and you don’t have to worry about the interest rate going up in the middle of the loan.
Variable rate loans often start with a lower interest rate (and therefore, lower initial payments) than a fixed loan, but these rates can change — typically, with limits on how much the interest rate can change per year and over the life of the loan. It’s possible with a variable rate loan that the interest rate can go up or down. During times when interest rates on boat loans are already low (such as in 2021), it’s not as likely to go down much further.
Sometimes, a loan is set up as a balloon payment loan, one in which payments may be similar to a fixed or variable loan, but the entire balance is due after a relatively short time — perhaps after two or three years. A consumer may take out a balloon loan if they plan to sell the boat after a couple of years and they see benefits in the balloon rates and terms.
Although when comparing lenders, it’s important to find out their interest rates and look at the annual percentage rate (APR) since it gives you a better comparative metric — a more apples-to-apples comparison. That’s because the APR lets you know the actual cost of borrowing funds at a particular financial institution. It’s typically higher than the interest rate because two additional factors are considered in its calculation: any loan fees being charged and any interest that will accumulate before you make your first boat loan payment.
Besides comparing the APR among lenders, also check to see how much of a gap there is between the interest rate and APR at each one. The greater the difference, the more fees the financial institution is charging on their boat loans.