Dollars & Sense

Understanding Boat Loans And Marine Insurance

FSF Staff October 26, 2013

With boat show season upon us, it’s time for buyers to put their money where their mouth is. With the latest 2014 models about to be unveiled and deals ready to be negotiated, upcoming shows are exactly when and where many current owners commit to moving up, or down. Additionally, a steady increase in real estate values and growing equity are helping drive an influx of new buyers to the market. In either case, boat builders and dealers are salivating in anticipation of another strong season.

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While pre-qualification isn’t necessary, visiting your banker prior to shopping around is always a good idea. Photo: istockphoto.com/globalstock

However, potential buyers shouldn’t be jumping for joy quite yet. Just because you want to buy a new boat and believe you can afford the extra monthly expense doesn’t mean you’ll survive the loan approval process. Boat loan policies are nowhere near as flexible as they once were, when the only requirement for approved funding was a promise and a pulse. We all know where that leniency got us—a financial meltdown followed by an overwhelming foreclosure crisis and billion dollar bailouts.

Recreational boats are by no means a necessity. While more flexibility may come in the future, what’s happening today is that every loan applicant is being evaluated with a fine-tooth comb.

Now that the smoke is starting to clear, lenders are still on their toes. Loan applications of all kinds are being studied under a microscope, and while we are light years ahead of where we were 24 months ago, boat buyers in particular should expect to be scrutinized.

Thomas Bell, President and CEO of Excel Credit Inc, a leader in the boat finance industry states, “While we have turned the corner from the 2008 economic crash and lenders are starting to relax a bit, there is still plenty of room for financial institutions to ease the reigns. Recreational boats are by no means a necessity. While more flexibility may come in the future, what’s happening today is that every loan applicant is being evaluated with a fine-tooth comb. Applications are being analyzed on a case-by-case scenario, paragraph-by-paragraph, line-by-line, and number-by-number with detailed and verifiable documentation required for everything. With no new lenders entering the game, the same four or five major players funding the vast majority of boat and yacht loans don’t want to get burned again.”

A typical loan application starts with the buyer’s qualifications, which include documented income, tax returns, carefully evaluated debt to income ratios, current financial obligations and of course, the almighty credit score. This number alone holds more clout than perhaps any other factor.

Next is the purchase price of the intended vessel along with the down payment amount. The larger the down payment, the less risk for the financial institution and the easier the loan will be to get approved.

As an example, lets pretend Joe Buyer has convinced his wife Jane that along with his recent promotion, the time has finally come for the family to purchase a new boat with an estimated purchase price of $250,000. The minimum that any lending institution will even consider on said transaction is a 15 percent down payment ($37,500). While loan terms typically range from 84- to 240-months, 180 months at the 15-year mark is usually the smartest decision. With an excellent credit rating and assuming Mr. & Mrs. Buyer exceed the required criteria, the couple should be able to qualify for a 4 percent interest rate with a monthly loan payment of around $1,650. This does not include insurance, dockage, fuel, or any other expenses associated with being a proud boat owner.

While on paper the loan looks straightforward and may have been approved in the not so distant past, today all anyone sees is a big red flag. Only a short period after the buyer takes ownership of their brand new boat it will likely be worth less than the outstanding loan amount. Even though the couple can afford the extra monthly expense, to get this loan approved the lending institution would require a much more substantial down payment in order to reduce their risk.

In reality, finance companies and credit unions tell us the vast majority of today’s boat buyers in the $250,000-plus range are putting down large down payments, sometimes as much as 50 percent of the purchase price. With so much equity right from the start, the loan is usually a slam dunk and can be funded in as little as four days.

Other factors that will influence the loan approval process include choice of power. The same boat powered by twin 500 HP inboards is much easier to finance than an identical vessel powered by triple 300 HP outboards. Clearly the inboard engines output more power and cost more than the outboards, but the stigma associated with multiple outboard powered boats is that the vessel is a Cigarette-style speed boat destined to be confiscated by the Coast Guard for running drugs or illegal immigrants.

Still, with an excellent credit score and substantial down payment, every loan can be funded; it just depends on the individual criteria for that particular scenario. Nothing is simple or straightforward any longer. Today, every purchase is carefully scrutinized and handled on an individual basis.

In any event, while loan prequalification isn’t necessary when shopping for a boat it certainly doesn’t hurt. Most of us know what we can and can’t afford, but a guaranteed loan approval helps tremendously when narrowing down your search for the perfect platform and provides the buyer with a wealth of negotiating power. Before you get your hopes up you should contact a financial institution and ensure you meet the criteria for the vessel’s purchase price and loan terms you have in mind.

Of course, right alongside financing comes insurance, which is an entirely different animal with another unique set of requirements.

Ron Bradley, a Pompano Beach, FL. Allstate agent who has insured boats for decades, tells us that many underwriters won’t touch a boat of any kind if it is in Palm Beach, Broward, Dade or Monroe Counties, where hurricanes are likely to hit. Another large percentage of underwriters won’t touch a boat powered by more than twin outboards, so an agent often has to look overseas to obtain adequate coverage, which is required by the finance company prior to final funding. While a simple insurance policy can be written over the phone in mere minutes, a complicated scenario could take 14 days to complete, assuming the required survey has been done and the entire application is in perfect order.

You may also be surprised to learn that along with your geographic location and the required coverage, credit score now plays a big role in obtaining insurance as well, not only with approval but also with rates. The premium on the same policy for the same two boats can vary greatly from one owner to the next depending on his or her credit rating. Call it unfair, but it is the world we live in.

Like with financing, it is good practice to contact your insurance agent in advance and let them know what your intentions are. While you don’t have to have a signed purchase order in hand, your agent will be able to discuss all of the options in advance and let you know exactly what you can expect so there are no surprises or unnecessary delays.

Nowadays, financing and insuring a new or pre-owned boat is nowhere near as easy as it once was, but certainly feasible. That is, as long as you are reasonable in your expectations and you’re willing to reduce the risk to the lender. Good luck and looking forward to seeing you on the water!

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