Boat Financing 101

By Gerald C. Pitts
Russo Marine Financial Services, Inc. , a subsidiary of Russo Marine, has teamed up with iboats to assist you with financing or refinancing new and pre-owned power and sail boats purchased from dealers, brokers or private parties.

As a boat financing professional I've seen any number of boat-purchase deals that almost fell apart because of the buyer's inability to obtain suitable financing - despite being qualified for the loan! Many were ultimately successful in finding financing because they were determined to get the boat of their dreams. But what happened the first time around? It was the "system" that defeated them. This article explains the boat loan process and strips away the mystery to help readers obtain favorable financing.

Boat Loan Sources.

Boaters are especially fortunate in having a whole array of lenders, brokers, credit unions and marine loan service companies available to arrange financing for their boat purchase. A lot will depend on whether you are buying from a Dealer, through a Broker or directly from the Owner, and how much of your purchase you wish to finance. Have all of the boat information available for discussion, such as year, make, model, power, optional equipment and any upgrades. Identify the total cost, which will include the purchase price and any equipment upgrades or additional accessories you may be considering and any excise or sales taxes that must be paid at the time of purchase, and any licensing or documentation expenses.

Then decide how much you want to invest in a down payment. A traditional approach is that you can finance up to 90% of the total cost. Some lenders may require more of a down payment and some specialty lenders even offer no money down programs. Once you've decided how much you want to finance it's time to pick your source.

The Local Bank.

Many local and regional Banks offer boat loans. Start with your own bank and either call them or check their website to see if they finance boat purchases. Inquire about rates and how long a loan term is available for the boat you are considering. Some local and regional Banks advertise in specialty boating magazines and publications. They are clearly seeking boat loan business and will have boat-savvy people available to review your needs. With this deal, you are sitting across the table from the banker.

The Boat Dealer.

If you're buying your new or pre-owned boat from a Dealer you'll usually get a real helping-hand with the loan process. Some sophisticated Dealers will have a Finance Manager on their staff who can handle the whole transaction for you, from assisting with the application right through to the loan closing and vessel licensing. Other dealers may not have a finance specialist on their staff, but they may employ an outside service company that handles all the same tasks, and they will arrange all of the details seamlessly. Some Dealers may simply send you to a finance broker that they refer business to, to have them handle the transaction. There are many advantages in buying a boat from a Dealer; they usually have several finance sources, they often maintain a full time, year round service department and have access to extended warranty programs that can be included in your financing. Sometimes there are special finance programs that are arranged between the manufacturer and the dealer, in association with one or more lenders, that can be very advantageous to you as the buyer.

Ask the Dealer to explain any finance options that may be available, such as ninety days to the first payment, or no interest for several months, or special rates available for certain models. The Dealer will be happy to explain all of their special programs that are designed to help you buy and pay for your boat on very favorable terms. In this scenario you are seated at a round table with the Dealer, which is a little more comfortable than sitting across the table.

The Boat Broker.

Many individuals employ a broker to represent their boat for sale, much like in a real estate transaction. The Broker has a contractual loyalty to the seller, and the seller will be paying the Broker a commission for his/her services in completing the sale. You, as the buyer, may be dealing directly with the seller's Broker or you may even be represented by your own buyer's Broker, in which case both Brokers will negotiate the sharing of the commission that is paid by the seller for the successful sale of their boat. Ask the Broker, or Brokers for a finance referral. These people are professionals whose purpose is to complete the sale transaction, and they will certainly be very aware of finance market conditions and available resources. This is also a round table event.

The Credit Union.

If you are a member of, or have access to, a credit union that does boat loans, be sure to contact them. Their rates are usually great, but they can be somewhat limited in the length of a marine loan, which will mean a higher monthly payment and , many times, the loan request has to go before a committee before a decision is reached, but this is more like a kitchen table event

The Financial Services Company.

These firms are in business solely to place financing for your purchase. They usually maintain relationships with local, regional and national lenders and are experts in the marine lending field. You can select from the ones that advertise in all of the usual boating and boats-for-sale magazines. Call for rates and terms and get some sense of application turn around time and loan document processing and funding of the sale transaction, then select the one that makes you the most comfortable. This could be the best way to go, because you will have your own financial service representative, sitting on your side of the table and negotiating for a loan approval to facilitate your purchase. Many of these companies will have access to extended mechanical warranties and will handle all aspects of licensing or documenting of your boat. Ask for a book-value print out on the boat you are considering, and ask for an internet search of 'comparables' vessels so you will have some sense of market value on the boat you are considering. These firms will also research the title on the vessel you are considering, because they are responsible for valid ownership transfers and placement of the lien created by your new loan. On your side and at your side at this table.

The Application Process.

Some lenders will require a full written application, while others will take the application right over the phone. Application forms and formats will be similar and will require that you provide your full name, present residential address and length of residence, whether you rent or own and either the name of your mortgage holder or the name and address of your landlord, and all your addresses for the past five years, date of birth, social security number, marital status, residential phone, employer name, address and phone number, length of time with that employer, and all employers for the past five years, occupation and your present income, usually expressed as gross income per month.

Remember to convert your weekly income to monthly by multiplying by 4.33. In other words, if you make $1,000. per week do not list $4,000. per month, but show $4,330. This will be very important when the lender examines your debt to income ratio during the loan underwriting process. Other monthly income should also be listed and can include such items as real estate rental income, retirement or disability benefits, alimony, child support, dividends and interest income.

The boat you are buying needs to be described completely and accurately, and remember to mention extra and optional equipment and any recent upgrades that may enhance the vessel's market value and address any equipment additions you are considering at the point of purchase.

You will be signing your application, which will include your authorization to have the prospective lender or financial services company examine your credit. If you do the application over the phone you will be verbally authorizing the credit review. This should complete the application process. Depending on the amount of the loan you are seeking, you may be asked to provide confirmation and evidence of your income.

Don't let the lender put you 'through the wringer' with tax return copies and other material until they have done their initial application review. They'll know their overall position on the loan after they examine your credit report. They usually won't need tax return copies if the amount financed is less than $100,000., although a few lenders want to see taxes above $50,000. If anyone wants tax returns below that level just look to another lender you're dealing with 'paper junkies' at this point.

When income verification is required, it will be in the form of copies of your tax returns for one or more years, and you may also be asked to prepare a personal financial statement, which is simply a snapshot in time of your assets and liabilities and which develops your net worth. Assets are cash, savings, cd's, real estate, business property, retirement accounts, stocks and bonds, cash value of your life insurance, your residential and any other real estate, household and personal property, automobiles, RV's, boats, jewelry, collections, etc. Liabilities are your debts; credit card and installment debts and mortgages.

The Loan Underwriting Process.

The boat loan decision process is, really, quite simple and straightforward. There are two major aspects that are examined; You and The Boat.

You:

Your credit history will be reviewed for it's general continuity and evidence of your responsible handling of present and past credit obligations. Payment performance on installment purchase contracts and leases will be an important benchmark, as will major undertakings such as a home mortgage. Of particular interest will be the level of revolving debt (credit cards) you have and the limits of your credit cards, expressed as available credit. If you have just one credit card with a $5,000. credit limit and you have a $4,000. balance then you have only 20% available. It's better to have five credit cards, each with a $5,000. limit, then the $4,000. balance will mean that you have 84% available. This makes lenders happier.

The core value will be your debt to income ratio. The lender will look at your present monthly obligations and add the monthly loan payment for the loan you are seeking to obtain. (and sometimes add the presumed operating and maintenance costs of the boat). A good resulting ratio is 40% or less. This is why it is vital to identify and list all income streams accurately.

The Boat:

The process here is for the lender to be satisfied that the selling price reflects a realistic market value of the vessel and that your down payment is sufficient and that the unpaid balance (the loan amount) is within the loan to value guidelines established by the lender. Other factors will come into play. The lender will look closely at the type of boat you are purchasing. A production boat will be looked upon much more favorably then a limited production or a 'go fast' type of vessel.

The lender will research the market value of your boat by referencing a 'book value'. This could be in any of several publications. The unfortunate thing about a 'book' value on a boat is that the books vary so much that they become unreliable, and they do not sufficiently account for upgrades or repowers, nor do they adequately account for low hours, new interiors and canvas, current electronics technology and general appearance and maintenance of the vessel. A more reliable value can be obtained from an experienced Marine Surveyor, and some lenders will ask for a survey as a condition of loan approval. Other lenders prefer the false security of the 'book' value gleaned from within their windowless offices. You, as a prudent purchaser, should want a thorough survey. For this, do not rely upon any referral you may obtain from any broker, dealer or lender. This is a close-up and personal matter and you must recognize that the Surveyor is your employee and agent and that, based upon the Surveyor's finding and recommendations, you will be committing to a substantial purchase.

OK - You're Approved.

Whew! Well, actually, the whole process took just a few hours, but it can be worrisome. After all, this is your boat we're talking about! Your recreation, your pleasure, your enjoyment, your free time, your passion.

What kind of loan did you end up with? The most favorable is a fixed rate, simple interest loan, with no or limited prepayment penalties.

There are other types of loans out there; some lenders fixate on a low initial rate to draw you in to a variable rate loan. This is somewhat like playing Black Jack with a blindfold on. Just ask yourself a simple question - what will interest rates be in six months, in one year, in three years. If you can accurately predict the answer about what the loan index is that you have been saddled with then you're in the wrong business. Quit what you're doing and become an investment banker, you'll be happier and wealthier.

Another minefield is the balloon loan. This insidious little devise requires that you pay the entire balance in, let's say, three years. Normally, this won't be done out of pocket, so you'll have to seek a new loan at that time. What will your credit be like? What will the rate environment be like? What will be the marine lending climate be like? What will your collateral be like?

Don't gamble on unknowns. If there is a better rate 'on the street' in six months or a year, simply refinance your boat loan to take advantage of the better interest rate. There are no costs associated with refinancing a boat loan, so it can become your off-season hobby, and you'll be able to gloat when rates go up and you're sitting pretty with your fixed rate for the full term.

Finally.

The loan closing and funding. This is just paperwork, and your lender or financial services provider will guide you through the process quite smoothly and professionally. Twenty or Thirty minutes of detailed paperwork and signatures and that boat is yours !

In Closing.

It's all about the Boat! Just because the process seems involved, don't lose sight of the objective. Those sweet days on the water are worth working towards and working for, align yourself with a marine finance professional and the rest is easy.

Russo Marine Financial Services, Inc.
Russo Marine Financial Services, Inc., a subsidiary of Russo Marine, can assist you with financing or refinancing new and pre-owned power and sail boats purchased from dealers, brokers or private parties. We have the resources and expertise to handle all aspects of your transaction from start to finish. We'll work directly with your seller to get you boating quickly. You can apply or inquire on-line, over the phone or via fax. And your loan closing can be done in our office, at your location, or via overnight courier. For more information on our rates and programs, please fill out our simple rate quote form. We're here for you!

Because we deal with such high volume, we offer the lowest rates and most favorable terms! No application fees, no points, just friendly, helpful service from our team of experienced marine lending professionals. As we like to say, "Financial services from boaters...not bankers!"

Gerald C. Pitts is a financial services veteran specializing in marine finance.

"Boat Financing 101" was originally published in Nor'easter magazine. We would like to thank Ira Black, publisher of Nor'easter and Gerald C. Pitts, the author, for allowing us to republish this valuable information for the benefit of boaters everywhere.

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