How is Boat Financing Different than Auto Financing?
Boat Financing is very different than Auto Loans
Most of our customers have substantially more experience financing cars than they do boats. Financing a boat is very different than a car, truck, or SUV. To point out the differences, lets compare boat financing vs. automotive.
Leasing is very common and is becoming even a more popular form of automotive finance. Leasing is really a long term rental agreement. When you lease a car, you agree to certain financial conditions like down payment, monthly payment, lease term (months and miles included), and conditions (like how the vehicle can be returned). Best case you walk away at the end of the lease with no additional fees. If you are over in miles or the condition of the vehicle does not meet the Lease Terms, you will need to pay more based on the conditions outlined in the lease agreement. For reasons we will discuss later, leasing is not a common form of boat financing.
Purchasing a car is similar to purchasing a boat with a few notable differences. Both cars and trucks as well as new boats have seen substantial price increases over the last decade. With the price increases, lenders in both areas have started offering longer terms to allow for lower monthly payments. The biggest differences between boat and automotive financing are the life cycle of the product, depreciation, and to a lesser degree warranty. As an example, most three year automotive leases build nearly 50% of the original purchase price into the cost of the lease as depreciation to allow the leasing company to resell the vehicle at the end of the term. This is done because most new automotive purchases have depreciated roughly 50% in three short years. Because of this, if a person has a 72 or 84 month auto loan on a new vehicle, they will frequently be “Backward” or in a position where they owe more on the loan than the vehicle could be sold for. That buyer is trapped in the loan until they can either pay the loan in full, pay the difference between the vehicle’s real market value and loan value, or try and finance the negative equity into a new vehicle purchase.
When customers see 20 year terms available for boat loans, they frequently equate the well earned negative consequences of long term auto loans to boat financing. The initial response is that if a 72 month auto loan is bad, a 240 month boat loan must be HORRIBLE!
The reality could not be farther than the truth. A 20 year boat loan gives the buyer all of the flexibility. In MN, the buyer can pay off or refinance the loan at any time without any penalties. Long term loans are the reason that leasing in a common form of boat financing. Nobody would lease a boat when they can spread the depreciation over a 20 year period. Banks are willing to offer longer term boat loans because unlike a 10 year old automobile, a ten year old boat still holds a high percentage of its original sale price and has a lot of useable life left. Consumer Reports says the average life expectancy of a new vehicle is around 8 years or 150,000 miles. Virtually every 10, 15, or even 20 year old boat is still on the water.
At the time of this writing, we have a six year old 2015 MasterCraft NXT 20 available used for a bit less than $60K. We sold that boat new in 2015 for $65K! The original owner decided to upgrade because he was amazed how well the boat would resell compared to his original investment. Not all boats resell this well but this situation is not uncommon.
20 years ago, we were selling new nicely optioned MasterCraft X-Star’s for less than $50,000. Those boats today would sell between $34,995 and $25,000 depending on condition. Most 20 year old automotive options are not on the road any longer or would not be viable for regular use if they were.
Because of a longer life cycle, boats have a slower depreciation rate than automobiles.
In our niche of the boat world, we sell premium products with long warranties. We see original OEM warranty coverage to 5 or even 7 years. This also helps with resale. When you sell a 3 or 4 year old car it is usually out of warranty. We see many boat owners trade in the 4-6 year window not because the boat is nearing the end of its life cycle like a car would be but because they can benefit from the high percentage of original sale price available and the next owner can buy a used boat with more confidence because of original manufacturer warranty coverage.
If a new boat buyer puts 10-20% of the original purchase price down, it would be uncommon to be “Backward” at any point during the course of a 20 boat year loan.
Reality is that almost no buyers hold the same boat 20 years making monthly payments all of the way. If they do, they pay off the loan at some point well before the end of the original loan term. The longer term gives buyers flexibility. Many of our customers like the ability to have a smaller minimum monthly payment that a longer term loan offers knowing that they can pay the loan down or off as they chose. You can pay more if you want, when you want. The interest rate is fixed. If rates go down, you can refinance. We see most customers have substantial equity if they chose to trade or sell even on loan terms on boat loans.
Some people say financing “toys” is a poor decision. This is also highly inaccurate. It is true that if you have a loan you will be paying interest on that loan. However, interest rates are historically low. We see customers with high credit scores and low debt to income scores as well as either a down payment or trade equity (lower loan to value) be offered fixed 4.99% 240 month loans. Many of these customers could write a check for the boat purchase. However, the savvy investors seeing returns of 10-15% in the market know they are “making” 5-10% by keeping their money working for them. If the market return ever changes, they can sell the investment and pay off the loan with no fees. The ability to write a check does not always make it the “best” solution to paying for a boat when inexpensive loans are compared with higher market returns.
There are a few areas where automotive financing is “better” or “easier” than getting a boat loan. Because of frequently smaller amounts financed, shorter loan terms, and a more established method to sell reposed vehicles, auto loans tend to have slightly lower interest rates than boat loans. Banks also know that if one of their customers gets into a difficult financial position, their boat loan will go into default before their daily driver or their home. For these reasons some banks are not as competitive on boat loans as that bank might be with other loan types.
Since we sell high end products, our customers tend to have excellent credit and payment history. We have developed a network of lenders who know the intricoes of boat financing and specialize in it. When the time comes to discuss payment options for your new boat. please let us know what works best for you and we will work with our network of lenders to find the perfect solution for your financing needs.