The Boat Loan Primer - The basics on your best boat financing options.

By Virgil Zetterlind

Article Continued

3. How do I choose a boat loan?

How long do you plan to own the boat? - The #1 consideration boat ownership is Depreciation (followed closely by maintenance costs)! New boats lose value very quickly - easily 20% in the 1st year alone. In a soft market, such as this summer with high gas prices, it can be difficult to sell even a bargain priced boat, so be sure your boat loan works with your time frame.

As an example, we purchased our 2001 Regal at about 40% of MSRP against a new 2005 model and only 60% against the best-deal out-the-door cost of the 2005 cruiser. If you are uncertain about how long you'll have the boat, make that 20% downpayment on the boat loan to give yourself some price flexibility.

How much is your home equity? - We believe the home equity loan is best considered when you can keep the LTV ratio under 70%, are reasonably stable in your current location, and can get competitive rates and terms against a normal loan. If home prices soften substantially, a high LTV home equity loan could leave you without a downpayment on another home if forced to move for a job or other unexpected reason. Home equity is the largest financial "safety net" for most Americans, and you don't want to borrow too much against it. You may own your boat free and clear, but it's a lot harder to get an emergency boat financing against a used boat than against a house (which historically appreciates rather than depreciates).

We'd stay away from a LOC loan, except for small amounts which can be paid off quickly. A fixed term also protects against future sticker shock when the LOC's interest-only payments stop.

If you're looking to buy an older "project" boat, home equity may be your only option if you can't afford cash. Older boats can be great deals - just be sure to do your part in establishing value prior to the purchase. Try to anticipate major repair or restoration costs also.

What's your exit strategy? - Have an out if you need to suddenly sell the boat. Your best position is to owe much less than it's worth. Expect that most boats take time to sell.

As we discussed in the home equity section, home equity gives you the boat free-and-clear, but may put you in a more difficult position in an economic downturn (it really depends on your individual situation). Don't deplete your cash reserves in the initial purchase as even new boats will require a lot of investment in upkeep and provisioning. Some claim as high as 5-15% of the purchase price to outfit a new boat with equipment.

Finally, we suggest you carry full insurance. A minor accident can total a boat - leaving you with no boat and a big loan. Watch for depreciation clauses which can drastically reduce your payout on older boats. If your boat is young (usually around 5 years or less), you can often get "agreed value" or even "replacement" coverage for a bit extra for added financial safety. Make sure your insurance terms match your boating environment (offshore limits, season limits, hurricane deductibles, …).

Conclusion

We hope you've found this article informative. Boat buying can be a big step, but we've found the family experiences invaluable. Remember to fully explore your boat financing options, and thanks for reading!

<< Page 1

Virgil Zetterlind gained his 'sea legs' as a midwestern transplant to the Florida Panhandle while serving in the Air Force. His family quickly outgrew their 1st boat, a 19' Chaparral Cuddy, which led to their purchase of a 28' Regal Express Cruiser (and his experiences related to boat financing in this article). In 2006, Virgil founded DestinSharks.com to share his family's experiences with boating and to explore the use of the then-new program Google Earth for marine applications. He is currently a Founder and Chief Technology Officer for EarthNC, Inc - Marine Charts for Google Earth thus keeping boating at the center of his work and play.