Cash, personal loan or mortgage? A look at the options. By Rick Francis as published in the February 2006 issue of Pacific Yachting Magazine
Update: 2010 While this is an older article, it is still accurate.
Unless you plan to pay cash for whatever boat you buy, you will require some form of financing. If this financing is not available from friends or family, chances are you will be dealing with some type of lending institution. Although some purchasers will obtain pre-approval for the maximum amount they can afford, it’s not necessary because most marine sales contracts can be written as conditional on the purchasers obtaining acceptable financing. Here are just a few financing options to consider.
DEALER PLAN FINANCING
Most dealers of new boats offer “in-house” financing. Their source of financing may be the vessel manufacturer, through its consumer finance division, or it might be through the “dealer centre” of a chartered bank, credit union or other consumer lending service. Some larger dealers offer the purchaser access to this financing through an in-house “business office” while others will outsource this service to a private company that acts, de facto, as their business office and that itself has a relationship with the dealer centre at a number of financial institutions.
Either the dealership or outsource business manager will assist purchasers in completing a financing/credit application to be submitted to the ideal source of financing for approval. Typically this application will include the specifics of the boat being purchased and the financial details of the transaction—for example, the purchase price, applicable taxes, down payment, details of any tradein or lien buyout, the balance to be financed, and, as with any kind of borrowing, the purchasers’ confidential financial information.
Regardless of what form it takes, dealer plan financing offers certain advantages over consumer-direct borrowing. First, because the purchaser is applying for financing through a dealer who is part of a huge “buying pool,” interest rates are generally lower than those available to purchasers dealing directly with their own bank. Second, dealer plan loans are secured only by the vessel being purchased via either a simple lien or a marine mortgage depending on the size of the vessel (i.e. no personal guarantees or other collateral are required).
Third, the term and amortization available on dealer plan loans are usually longer (e.g. five-year term, 20-year amortization), which can result in lower monthly payments, and the balance of the principal amount can usually be reduced or paid out entirely, at any time, without penalty.
Fourth, the purchaser’s credit rating determines the amount of the down payment required, which can be as low as 0%, although down payments of 15% to 20% or more are typical and will result in the lowest interest rates and payments.
And last, during normal business hours the approval of finance applications through the dealer usually takes a matter of hours as opposed to days or weeks.
All that said, dealer plan financing is only available on new or preowned vessels in the inventory of a dealer who has been pre-approved for membership in the dealer pool of one or more financial institution, not on pre-owned vessels sold on brokerage/ consignment or privately. The most prominent local outsource dealer plan service provider is Walker Financial Services.
Purchasing a new or pre-owned vessel from a dealer’s inventory doesn’t mean you must finance it through their dealer plan if they offer one. Most major banks are happy to discuss marine financing directly with the purchaser, especially those with whom they already do business and/or who have an excellent credit rating. Branch level financing will likely be either a personal loan or a personal line of credit.
However, one should not assume that every branch of every bank will be sufficiently experienced in marine financing to ensure a smooth and issue-free application, approval and funding process. This is especially true when purchasing larger, more expensive vessels. The banks have placed their marine loan experts in the dealer centres where they are able to focus on their specialty.
To facilitate a sale, most boat dealers/ brokers can provide a list of those lenders who understand the financing of pleasure craft. Of course, the purchaser can seek out a bank, a branch of that bank and a loan officer at that branch that can demonstrate a proven track record of financing pleasure craft. If your branch can’t prove that it does, ask them to recommend another of their branches that can.
Personal loans from banks may have stricter qualification requirements and/or less flexible terms, shorter terms and/or amortization, and require additional collateral or security.
Depending on the amount to be financed, bank customers might also want to inquire about a personal line of credit. Some of these can be totally unsecured, while others—usually the ones for larger amounts—require security in the form of liens or other encumbrances against the vessel or other owned property. The line of credit may have a lower initial rate; however, it will most likely be a floating rate that will fluctuate based on the prime rate.
Regardless of what financial instrument you and your bank mutually agree on, if you are buying a pre-owned boat the bank will require you to provide, at your cost, a current marine survey and mechanical inspection to ensure the vessel is a good “risk.” (These are a very good idea regardless of if they are required by the bank or not!) New or pre-owned, depending on the amount of the loan and size of the boat, they may also register a lien or marine mortgage against the vessel, which, again, will be at your cost.
HOME (PROPERTY) EQUITY
Today’s rapidly escalating real estate prices have resulted in many homeowners enjoying significant increases in home/property equity. At the same time, mortgage money is available at near-record low rates—certainly lower than the rates a bank would charge for a personal loan or line of credit.
It’s no surprise, then, that boat dealers/ brokers are finding more and more purchasers, especially among graying baby-boomers and empty nesters who are obtaining the necessary funds to make their boating dreams into reality by either increasing the existing first mortgage on their home or other owned property, or taking a second mortgage.
Lawyer’s fees for writing the mortgage may apply. Repayment of mortgages will have more restrictions than dealer loans and some branch level loans.
Keep in mind your whole financial picture and try not to limit your financial flexibility. The low interest rate of a mortgage on your house comes with a few strings. Make sure you understand them.
MARINE FINANCE BROKERS
If your dealer doesn’t offer in-house financing or if, for whatever reason, none of the other options given are available, ask your dealer or the person you’re buying the boat from about contacting a local marine finance broker who, usually for a fee, will research all the available financing alternatives and recommend the one best suited to your needs and personal circumstances. Because they have access to funds from lenders other than the major banks, including private lenders, this could prove to be the best course for those whose credit is somehow impaired and who are not put off by the potential for higher costs.
Rick Francis heads the powerboat division of Westerly Yacht Sales, is a Certified Yacht Broker (CYB), a director of the BCYBA, and member of the Vancouver Boat Show advisory committee. 96 • February 2006 • www.pacificyachting.com