Features June 2001 Issue

Special Boatbuying Section:
Stick With the Pros On Loans

If you’re approaching that second-happiest day in a sailor’s life, someone’s going to ask you to show them the money. As easy as the Internet makes it look, you should seek professional help.

It’s fun to daydream about rig configuration, gear options, engine type, and navigation gear, but if you’re an earnest boatbuyer, you’re probably going to need a finance package that fits your needs.

Go online to find out what to expect in a loan
transaction. You may end up making your
application there, but in the meantime check
brokers’ placards on the types of boats you
are looking for. Call the brokers for advice.

 

To research this article, we put ourselves in the mindset of a boatbuyer in search of financing, and went shopping, starting on the Internet and moving into the human realm.

Some of the websites that offered marine financing were informative; some were more sales pitch than education, leading you quickly to a loan application with photos of people having fun on the water and text that drew you in: “Click here! Apply today! It’s fun, fast, and easy!” Boat financing websites are an asset for initial research and even applications, but this is not a procedure you’ll want to go through without talking to real people on the phone or in person.

The search for funding is smoother if you can define ahead of time the kind of loan or cash/financing balance you’re looking for. Obviously, we can’t discuss the fine points of tax and financial planning here—that’s between you and your financial advisor. But we can give you general routes to consider.

Cash vs. Financing
You may be planning to use cash for a significant part or for all of your purchase, either by liquidating investments or dipping into cash reserves. Before you do, look at the big picture:

If you’re getting a decent return on your investments, balance that against the interest rate you can get on a loan (at the time this article was written, a rate of 7.5% on a $100,000+ boat loan was commonly advertised). Remember too that your boat may qualify as a second home, or that you might decide to use a home equity loan to finance your purchase. With those scenarios, you may be able to qualify for tax deductions. An interest rate lower than your investment earning rate and tax savings may cause you to detour away from the cash route.

Borrowing Against Your Home
Statistically, boat owners are an affluent group. According to a survey conducted by the National Marine Bankers Association (NMBA)—a membership organization for marine lending institutions that is an affiliate of the National Marine Manufacturers Association (NMMA)—individuals who took out boat loans from their member banks fit the profile of a 45-year-old with an annual salary of $113,000. So you can expect to be courted.

You may walk into your local bank and find out they don’t offer boat loans. But chances are, their staff will be quick to suggest other types of loans they do offer. If you’re a homeowner, they may steer you towards a home equity loan (a one-time loan) or home equity lines of credit (a revolving line of credit).

Keep in mind that a recreational boat falls into the category of a luxury item you want, not something you need. If you take out a home equity loan, you’re tying up resources you may need for emergencies or if your circumstances change. Once you’ve invested your spare equity in a boat, it’s not as easy to borrow against that floating asset the way you would borrow against a home.

Consider your tax implications as well. The home mortgage interest deduction is limited to interest paid on home equity loans up to $100,000. But you may be financing more than that amount. If you take out a boat loan and your boat qualifies as a second home, you can deduct interest on loans that exceed that $100,000 mark. Again, this is an issue to explore with a professional advisor.

You may only be in the boat-browsing stage. But if you find the right boat, you’ll be anxious to get your financing in order. If you’re going the home equity route, make sure you understand the time-frame: Bank lenders we canvassed quoted time-frames of two to three weeks, from the initial application stage to the closing.

Boat Loan Specialists
The marine finance field is a small, specialized segment of the finance world (the NMBA counts only 70 members in its roster). However, it’s a competitive business and as a consumer, you may come across a range of options in your search for funding: a local bank that offers boat loans; marine specialists who can broker loans to a variety of lenders; national banks that have established recreational lending divisions that feed the entire food chain, from lending money to manufacturers, to dealers building inventory, to consumers. Loans can be arranged through outfits like West Marine and BoatUS, and even by boat dealers themselves.

Here are some of the areas you should consider in narrowing down your list:

Level of expertise: In our research, we found local branch banks that did offer boat loans. But in most cases those banks did not have marine specialists on their staff who had the same level of knowledge as individuals who secure marine loans every day.

Lang Ryder of Seacoast Marine Finance (a division of the First National Bank and Trust Co. of the Treasure Coast that originates loans from their own portfolio and also goes out to other marine lenders) explains that many of their customers try non-marine sources first before consulting a specialist. “Typically, a customer goes first to their personal banker, but that banker doesn’t convey a deep level of knowledge or speak intelligently about the transaction.”

We found that to be true in our discussions with local banks.

If you’re working with boat dealers or yacht brokers, ask them for recommendations. These people want to close a sale, so they’re likely to refer you to an outfit that can get the job done.

In most cases, reputable dealers and yacht brokers linked us with the companies that conveyed a specialist’s knowledge of boats and could broker loans to a number of lenders.

You can also contact the National Marine Bankers Association (contact Bernice McArdle at 312-946-6280 or bmcardle@nmma.org) and ask for a list of their members in your region.

Service and accessibility: A lender’s website and a phone call or two can tell you a lot. Some websites we visited offered little but sales pitches; others had useful content. In our phone calls, we talked to people who were clearly administrative workers taking information over the phone, as well as true specialists who conveyed expertise about boats and boat purchases.

In some cases, it took two to three phone calls to get hold of a loan officer; in others, we were talking to a marine specialist with one phone call. Access to the resident experts is critical. “What we are is a service company,” said Tom Smith of Sterling Associates, a company that places boat loans with a variety of lenders. Don’t settle for less.

Research skills: The boat-buying deal is more than the passing of checks. A lender will first have to come to a determination on the value of your intended boat. They’ll consult sources such as the BUC Used Boat Price Guide, but as Alan Swimmer of Beacon Marine Credit says, “These are guides, and I use them as just that— I don’t consider them the Bible.” Swimmer relies as much on his evaluation of a customer’s good common sense, a marine survey, and checking the marketplace to find comparable boats for sale.

One advantage of going with a marine specialist is that he or she will know the system for determining that a boat is owned by the seller, free and clear. “You know you’re getting a boat that has no liens or encumbrances on it,” says Swimmer. “You know the seller has the right to sell that particular unit.”

Paper-pushing skills: When you buy a house, you have a title search done. There are equivalents for boats, but the system varies depending on the size of the boat. Larger recreational boats can qualify for Coast Guard documentation. This is basically a tracking of a boat’s history of origin and its ownership. Once the documentation is complete, to ensure there are no liens on the boat, a bank can file a First Preferred Ships Mortgage on the vessel at the federal level.

Many lenders require documentation as a condition for financing a boat purchase, but it also gives the buyer an added level of security. The system was not designed for recreational boats, according to Susan Ellis of Coastal Documentation, a documentation service on the coast of Maine. But it’s a system that is routinely used in recreational boat buying.

Your purchase can qualify for documentation according to a formula computed by the U.S. Coast Guard, whereby a vessel must be a minimum of 5 net tons displacement and usually 25 feet in overall length with an 8-foot beam. Smaller boats will qualify for state titling, if you’re in a title state, or for a Uniform Commercial Code (UCC) whereby the lien on the boat is filed with the state.

A marine specialist will be able to advise you on these different systems and coordinate the documentation process for you, for a fee. In most cases, specialists had a stable of Coast Guard documentation services whose work they trusted. In our research, the average fee quoted was around $450.

Some outfits that offered boat loans made it clear on their websites that they did not finance wooden boats or offer financing to liveaboards. But many marine specialists we talked to—particularly those who could broker loans to a variety of lenders—had lenders with whom to place those types of buyers. If you plan to buy an older wooden boat, a high-performance boat, or a vessel you plan to live aboard, make sure you have a marine specialist who works with different lenders on your list of potential sources.

Timeliness: Most companies that specialize in securing marine loans make a point to advertise their speed in approving applications. Many advertised a time-frame of 24 to 48 hours; some promised to approve an application within one business day.

Speed of service ran across the board, but if you go the non-boat loan route, compare your time-frames. If you find the boat of your dreams and you want to have it delivered by a certain date, fast service on your financing may be of the essence.

Finance products: While some boats carry a price tag higher than the average home, most loans fit into what Lang Ryder of Seacoast Marine calls the “plain vanilla variety.”

Most companies offered simple-interest, fixed-rate loans with no fees and no prepayment penalties. (True, the loan has no fees; but you’ll pay a fee to your marine lender for Coast Guard documentation, state registration, etc. if they organize it for you.) Buying points to lower your interest rate, which is common in home mortgages, was not offered in the marine loans we researched.

Some outfits also offered variable-rate loans. Here you take the risk of riding the tide of the interest rate, but Ken Landon—president of Key Recreation Lending, a division of KeyBank USA—points out that tide may turn in your favor. “Smart money is betting on the prospect of rates going down. So if you took the adjustable rate now, that rate would float down as the Fed makes its cuts and you would not have to pay the fees to refinance in a year or six months from now.”

In general, a 20% downpayment is common on a boat loan. Many lenders offered loans for 10% or 15% down, however you may pay a higher interest rate for less money down.

Some companies do advertise zero-down loans, but if you go that route, it’s likely you’ll be paying a higher rate. Also be aware, as Howard Haskin of Essex Credit points out, that if you get a zero-down loan and go to sell that boat in three years, the amount due on the loan may exceed the price you’re able to get.

Loans can be stretched to 10, 15, and even 20 years. Most companies offered 20-year terms on amounts over $100,000. However, some lenders could find 20-year terms for loans starting at $75,000.

By stretching the terms to 20 years, you’ll pay more for that loan. Landon of Key Recreation Lending had some advice here. “If you can afford the 10-year terms, go for a 10-year loan rather than 15. You’ll build equity in your boat faster. As we all know, boaters are always dreaming about that next boat.”

Some outfits did offer different types of programs beyond the fixed-rate loan with a monthly payment. Key Recreation Lending has programs where you can make one annual payment instead of 12, or suspend payment for three months of the year. These scenarios might be best for people whose income fluctuates or for those with seasonal downtime.

Rates: Many outfits publish their current rates on their websites (some also include payment calculators so you can factor what you monthly payment will be). These are the rates in the offing: no company will commit to an interest rate until your application is filed.

You can rate shop, but sources we queried stated that the differences an avid shopper will find will likely be one-quarter to one-half percent apart. The strongest determinant s of the rate will be your credit history, liquidity, and financial situation.

With home mortgages, the interest rate increases as your borrow more money and reach the level of a jumbo mortgage. But in marine lending, this situation is reversed and the more money you borrow, the lower the interest rate will be.

Web Shopping vs. Face-Time
It’s clear that there’s a niche for online boat-loan services: Boatsbank (an Internet marine financing system for boat dealers and consumers powered by boats.com and KeyBankUSA) reported a 389% increase in application volume in 2000. But most specialists who broker marine loans reported that a large percentage of their business comes from dealer referrals, repeat customers, and customer referrals—not via the Internet.

When all the boat-loan sites pop up in your search, it may be tempting to file a half-dozen applications and see what finance packages come back. But that’s not the way to go: When you fill out a loan application, you give that organization the power to check your credit reports and employment history. Some websites point that out up front; some bury it in the fine print. According to Jeff Johnson of Maritime Finance, having that many inquiries on your credit report is not advisable, as it can impact your credit score.

In addition to applying online, many sites offer the option of printing the form out and mailing it in. Choose this option, as you’ll almost certainly need to attach tax schedules and bank statements anyway.

Johnson himself—whose company runs a website at eyachtloan.com—advises customers to get on the phone and talk to the company they’re considering working with, and then mailing or faxing an application in. In your phone conversation, you can learn about the company’s level of expertise; how they handle Coast Guard documentation; their turn-around time; if you have any unique circumstances in your credit history that would help or hinder your application; and if that individual is someone with whom you feel comfortable discussing your financial situation.

According to Howard Haskin of Essex Credit, that conversation also gives a broker a chance to gain information that may eventually help the customer, such as learning what’s important to the customer in terms of a finance package and to learn if there are other details not asked for on the application form that may make a customer more attractive to one of his lenders.

Conclusions
It’s not impossible for a pleasure boat to be a good investment, but as most owners know, it’s not the way to bet. Boats tend to depreciate , so it wouldn’t be wise to sacrifice your more valuable assets (like equity in your home) to buy one.

To us it makes sense to put down as big a downpayment as you can manage comfortably, then go for equity. If the boat can qualify as a second home and you can deduct some interest, so much the better. Again, talk to your financial advisor.

As of this writing, the financial markets are volatile, and we wouldn’t presume to advise you on whether to go for a fixed or variable loan. (We’re pretty sure that if we went with a variable, interest rates would skyrocket.) Just repeat this mantra— it’s not an investment, it’s a purchase.

As for borrowing money, in our research, local branch banks had the least expertise regarding boat loans. It often took several calls to get through to a loan officer, most of whom didn’t have an expert grasp of the boat-buying deal. (One bank that offered boat loans didn’t know any specifics on Coast Guard documentation).

Go with the pros. When we called specialists who broker boat loans every day—such as Essex Credit, Beacon Marine Credit, Maritime Finance, Sterling Associates, and Seacoast Marine Finance—we connected quickly with experts. Loans rates between those companies varied no more than a small fraction; without actually obtaining a real loan, there was little to choose between them.

If you apply to, say, four different outfits that broker marine loans to a number of lenders, chances are they’ll have several lenders in common. All that shopping may lead you back to the same products in the end.

If you’re shopping seriously, but don’t have a specific target in your sights yet, it would be smart to get pre-approved for a loan that will cover your needs. Pre-approval serves several purposes: You’ll have the money the moment you need it, and it will tend to prevent you from overstepping your sensible limits if something more expensive than what you budgeted for catches your eye. It could also give you an advantage over another potential buyer if the owner is anxious to sell. If your competitor needs a few weeks, or even days, to get funding, you’ll be the bird in hand.

When you file an application online, you don’t know the backgroundof the person who reads it. As a buyer, you should feel comfortable that you’re getting expert guidance in your search for funding. By all means, use the Internet to do your initial research. Learn the basics online. Download loan applications. Compare services. Then talk to the humans.

Contatcs- Contact- Beacon Marine Credit, PO Box 133, Spencerville, MD 20868, 877/222-0301, www.beaconconsumer.com. Boatsbank, (online service only) BoatUS, 703/941-2770, www.boats.com. Coastal Documentation, Grierson Road, Spruce Head, Maine 04849, 207/596-6575, www.coastaldocumentation.com. Essex Credit Corp., PO Box 580, Essex, CT 06426, 800/431-5626, www.essexcredit.com. KeyBankUSA, 800 Superior Ave., Cleveland, OH 44114, 800/539-3123, www.keybankusa.com. Maritime Finance, 901 S. Federal Highway/Suite 201, Ft. Lauderdale, FL 33316, 954/764-3010, 877/YACHT-LOAN, www.eyachtloan.com. National Marine Bankers Assn., 200 East Randolph Drive, Suite 5100, Chicago, IL 60601, 312/946-6200, www.nmma.org. Scott Financial Services, 914 S. Wolfe Street, Baltimore, MD 21231, 800/556-0666, www.marineloan.com. Seacoast Marine Finance, 2601 E. Oakland Park Blvd., Suite 601, Ft. Lauderdale, FL 33306, 877/916-2326, www.seacoastmarine.net. Sterling Associates, 49 Church St., Whitinsville, MA 01588, 800/286-8073, www.sterlingboatloans.com.

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